Faced with headquarters\' desire to add a new product line, Stefan Grenier, mana

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 ROl 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 ROl, with year-end bonuses given to divisional managers who have the highest ROl Operating results for the company's East Division for last year are given below: $26,600,000 14,120,000 Sales Variable expenses 12,480,000 10,086,000 Contribution margin Fixed expenses Operating income Divisional operating assets 6,650,000 $ 2,394,000 The company had an overall ROI of 16% last year (considering all divisions). The new product line that headquarters wants Grenier's ast 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

Explanation / Answer

1 Correct 2 Correct 3 Adding the new line would increase the company's overall ROI 4 a. Computation of residual income: Present New line Total 1) operating income (Note:1) 2394000 684000 2) cost of investment 6650000 3800000 3) Required ROI 13% 13% 4) 2*3 864500 494000 5) Residual income 1-4 1529500 190000 1719500 Notes: 1. Operating income for New line: Sales 11400000 Less:variable expenses (11400000*65%) 7410000 Contribution margin 3990000 less:Fixed expenses 3306000 Operating income 684000 b. accept the product line since it will increase the residual income

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