Question

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

     Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company’s East Division for last year are given below:

Sales	$	35,000,000
Variable expenses		15,200,000
Contribution margin		19,800,000
Fixed expenses		17,350,000
Operating income	$	2,450,000
Divisional operating assets	$	8,750,000

The company had an overall ROI of 14% last year (considering all divisions). The new product line that headquarters wants Grenier’s East Division to add would require an investment of $5,000,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales	$	15,000,000
Variable expenses		65% of sales
Fixed expenses	$	4,500,000

Required:
1. Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line were added. (Do not round intermediate calculations. )

ROI - Present %, New line %, and total % ?

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

• Accept

• Reject

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

• Adding the new line would decrease the company's overall ROI.

• Adding the new line would increase the company's overall ROI.

4. Suppose that the company’s minimum required rate of return on operating assets is 11% and that performance is evaluated using residual income.

a. Compute East Division’s residual income for last year; also compute the residual income as it would appear if the new product line were added.

Residual income - Present, New Line, Total?

b. Under these circumstances, if you were in Grenier’s position, would you accept or reject the new product line?

• Accept

• Reject

Answer 1