Return on Investment and Residual Income

Problem 11-21 Return on Investment and Residual Income [LO3, LO4] Faced with headquarters’ desire to add a new product line, Stefan Grenler, manager of Bilt 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 yearend bonuses glven to divisional managers who have the highest ROI, Operating results for the company’s East Division for last year are given below: The company had an overall ROI of
18%  Return on Investment and Residual Income
last year (considering all divisions). The new product line that headquarters wants Grenier’s East Division to add would require an investment of
$4,600,000

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. The cost and revenue characteristics of the new product line per year would be as follows: Required: 1. Compute the East Division’s ROI for last year; also compute the ROl 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.) 4. Suppose that the company’s minimum required rate of return on operating assets is
17%
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. Undor these circumstances, if you were in Grenier’s position, would you accept or reject the new product line? Accept Reject Return on Investment and Residual Income

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