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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 $ $26,600,000$

Variable expenses $14,120,000$

Contribution margin $12,480,000$

Fixed expenses $10,086,000$

Operating income $ $2,394,000$

Divisional operating assets $ $6,650,000$

The company had an overall ROI of $16\%$ last year $($considering all divisions$).$ The new product line that headquarters wants Grenier$$s East Division to add would require an investment of $$3,800,000.$ The cost and revenue characteristics of the new product line per year would be as follows:

Sales $ $11,400,000$

Variable expenses $65\%$ of sales

Fixed expenses $ $3,306,000$

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. Round your final answer to the nearest whole number.$)$

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

multiple choice $1$

Accept

Reject

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

multiple choice $2$

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 $13\%$ 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.

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

multiple choice $3$

Accept

Reject

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