In: Accounting
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$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 all
divisions). The new product line that headquarters wants Grenier’s
East Division to add would require an investment of $2,325,000. The
cost and revenue characteristics of the new product line per year
would 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 the
ROI as it would appear if the new product line were added. (Do not
round intermediate calculations. )
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 increase the company's overall ROI.
Adding the new line would decrease the company's overall ROI.
4. Suppose that the company’s minimum required rate of return on
operating assets is 20% 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.