?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 $ 16,200,000
Variableexpenses 13,000,000
Contributionmargin 3,200,000
Fixed expenses 1,985,000
Net operatingincome $ 1,215,000
Divisional operatingassets $ 5,400,000

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 $3,180,000.The cost and revenue characteristics of the new product line peryear would be as follows:

Sales $9,858,000
Variableexpenses 65% ofsales
Fixed expenses $2,720,808


Compute the East Division?s ROI for last year; also compute theROI as it would appear if the company performed the same as lastyear and added the new product line. (Do not roundintermediate percentage values. Round other intermediatecalculations and final answers to 2 decimal places.)

Present %
New product linealone %
Total %
2. If you were in Fred Halloway?sposition, would you accept or reject the new product line?
3. Why do you suppose headquartersis anxious for the East Division to add the new product line?
Adding the new line would increasethe company's overall ROI.
Adding the new line would decreasethe company's overall ROI.
4. Suppose that the company?sminimum required rate of return on operating assets is 15% and thatperformance is evaluated using residual income.
a. Compute the East Division?sresidual income for last year; also compute the residual income asit would appear if the company performed the same as last year andadded the new product line.
Present $
New product linealone $
Total $
b. Under these circumstances, ifyou were in Fred Halloway's position would you accept or reject thenew product line?

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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