Faced with headquarters’ desire to add a new product line,Stefan Grenier, manager of Bilti Products’ East Division, felt thathe had to see the numbers before he made a move. His division’s ROIhas led the company for three years, and he doesn’t want anyletdown.

     Bilti Products is a decentralizedwholesaler with four autonomous divisions. The divisions areevaluated on the basis of ROI, with year-end bonuses given todivisional managers who have the highest ROI. Operating results forthe company’s East Division for last year are givenbelow:

  Sales$21,700,000

  Variable expenses 13,490,000

  

  Contribution margin 8,210,000

  Fixed expenses 6,474,000

  Operating income$1,736,000

  Divisional operating assets$4,340,000

The company had an overall ROI of 22% last year (considering alldivisions). The new product line that headquarters wants Grenier’sEast Division to add would require an investment of $2,325,000. Thecost and revenue characteristics of the new product line per yearwould be as follows:

  Sales$9,300,000

  Variable expenses 60% of sales

  Fixed expenses$3,162,000

Required:
1. Compute the East Division’s ROI for last year; also compute theROI as it would appear if the new product line were added. (Do notround intermediate calculations. )

2. If you were in Grenier’s position, would you accept or rejectthe new product line?

Accept

Reject

3. Why do you suppose headquarters is anxious for the EastDivision to add the new product line?

Adding the new line would increase the company's overallROI.

Adding the new line would decrease the company's overallROI.

4. Suppose that the company’s minimum required rate of return onoperating assets is 20% and that performance is evaluated usingresidual income.

a. Compute East Division’s residual income for last year; alsocompute the residual income as it would appear if the new productline were added.