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“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products’ East Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”

Kirsi 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 $ 21,000,000
Variable expenses 13,400,000
Contribution margin 7,600,000
Fixed expenses 5,920,000
Net operating income $ 1,680,000
Divisional operating assets $ 5,250,000

The company had an overall ROI of 18% last year (considering all divisions). The company’s East Division has an opportunity to add a new product line that would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales $ 9,000,000
Variable expenses 65% of sales
Fixed expenses $ 2,520,000
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Kirsi Products
1. Computation of East division's ROI
ROI = Net operating income/Operating assets
=1,680,000/5,250,000
=32%
New product line:
Operating income = Sales - Variable costs - Fixed costs...