ROI = Net Operating Income / Average Operating Assets

1) Northern Division ROI for last year:

Net Operating Income Last year $ 1,995,000
Average divisional operating assets last year $ 9,500,000
ROI for Last year (1,995,000 / 9,500,000)
21.00%

Northern Division ROI for last year 21.00%

2) Northern Division ROI if New Product line added

Net Operating Income (1,995,000 + 400,000) $ 2,395,000
Average divisional operating assets (9,500,000 + 2,500,000) $ 12,000,000
ROI if new product line added (2,395,000 / 12,000,000) 19.96%

Northern Division ROI if new product line is added 19.96%

3) Manager should REJECT new product line based on ROI because overall ROI will decrease
from the last year if manager accepts the new product line

4) Northern Division residual income for Last year

Residual Income= (Net Operating Income - Minimum Required Return)
Minumum Required Return = (Average operating assets × Minimum acceptable rate of return)

Net Operating Income $ 1,995,000

Less: Minimum required return (9,500,000 × 15%) (1,425,000)
Residual Income $ 570,000

Northern Division residual income for last year $ 570,000

5) Northern Division residual income if the new product line is added

Net Operating Income $ 2,395,000
Less: Minimum required return (12,000,000 × 15%) (1,800,000)
Residual Income $ 595,000

Northern Division residual income if product line added $ 595,000

6) Northern Division manager should ACCEPT the new product line based on the residual
income. Because the residual income would increase if Manager accept the new product line
from the last year.