Question #$4(18$ marks$)$

Faced with headquarters' desire to add a new product line, Cathy O'Malley manager of ACME

Products' Canadian Division, felt that she had to see the numbers before she made a change.

Her division's ROI has led the company for three years, and she wants to continue this trend.

ACME 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 Canadian Division for last year are given

below:

The company had an overall ROI of $18\%$ last year $($considering all divisions$).$ The new product

line that headquarters wants Cathy to add to the Canadian Division would require an

investment of $$3,000,000.$ The cost and revenue characteristics of the new product line per

year would be as follows:

Required:

Compute the Canadian Division's ROI for last year; also compute the ROI as it would appear if

the new product line were added.

If you were in Cathy O'Malley's position, would you accept or reject the new product line?

Clearly explain.

Why do you suppose headquarters is anxious for the Canadian Division to add the new

product line?

Suppose that the company's minimum required rate of return on operating assets is $18\%$ and

that performance is evaluated using residual income.

a$.$ Compute the Canadian 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 Cathy O'Malley's position, would you

accept or reject the new product line?