Question

“I know headquarters wants us to add that new product line,”said Fred Halloway, manager of Kirsi Products’ East Division. “ButI want to see the numbers before I make a move. Our division’sreturn on investment (ROI) has led the company for three years, andI don’t want any letdown.”

Kirsi 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 given below:

Sales	$	28,000,000
Variable expenses		13,000,000
Contribution margin		15,000,000
Fixed expenses		12,816,000
Netoperating income	$	2,184,000
Divisional operating assets	$	5,600,000

The company had an overall ROI of 18% last year (considering alldivisions). The company’s East Division has an opportunity to add anew product line that would require an investment of $3,030,000.The cost and revenue characteristics of the new product line peryear would be as follows:

Sales	$9,393,000
Variable expenses	65% ofsales
Fixed expenses	$2,601,861

Suppose that thecompany’s minimum required rate of return on operating assets is15% and that performance is evaluated using residual income.

a.	Compute the EastDivision’s residual income for last year; also compute the residualincome as it would appear if the company performed the same as lastyear and added the new product line.

	Residualincome
Present	$
Newproduct line alone	$
Total	$

b.

Under thesecircumstances, if you were in Fred Halloway's position would youaccept or reject the new product line?

Accept

Reject

Financial datafor Bridger, Inc., for last year are as follows:

Bridger, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	127,000	$	126,000
Accounts receivable		333,000		489,000
Inventory		574,000		472,000
Plant and equipment, net		806,000		793,000
Investment in Brier Company		410,000		432,000
Land(undeveloped)		245,000		248,000
Total assets	$	2,495,000	$	2,560,000
Liabilities and Stockholders' Equity
Accounts payable	$	371,000	$	339,000
Long-term debt		972,000		972,000
Stockholders' equity		1,152,000		1,249,000
Total liabilities and stockholders' equity	$	2,495,000	$	2,560,000

Bridger, Inc. Income Statement
Sales		$	4,278,000
Operating expenses			3,507,960
Net operating income			770,040
Interest and taxes:
Interestexpense	$ 130,000
Tax expense	208,000		338,000
Net income		$	432,040

The company paiddividends of $335,040 last year. The “Investment in Brier Company”on the balance sheet represents an investment in the stock ofanother company.

Required:
1.	Compute the company’s margin, turnover, and return on investment(ROI) for last year. (Round your intermediate calculationsand final answers to 1 decimal place.)

Margin	%
Turnover
ROI	%

2.	The board ofdirectors of Bridger, Inc., has set a minimum required return of19%. What was the company’s residual income last year?

Residual income

$