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Brock University *
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Course
3413
Subject
Finance
Date
Nov 24, 2024
Type
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Pages
1
Uploaded by MateResolve7874
Sleepy
Owl
Company
allows
its
divisions
to
operate
as
autonomous
units.
Their
results
for
the
current
year
were
as
follows:
Required:
a.
b.
c.
d
Pillow
Blanket
Bed
Sheet
Revenues
$2,250,000
|
$500,000
|
$4.,800,000
Current
assets
800,000
152,500
1,435,000
Capital
assets
1,000,000
|
400,000
1,750,000
Current
liabilities
350,000
75,000
540,000
Net
operating
income
220,000
60,000
480,000
After-tax
income
143,000
39,000
312,000
Weighted
average
cost
of
capital
|
8.5%
8.5%
8.5%
Return
on
sales
Return
on
investment
based
on
total
assets
employed
Economic
value
added
Residual
income
based
on
net
operating
income
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Operating expenses
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640,000
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(a)
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Ur
Babylon
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$4,000
Accumulated depreciation
$1,500
$1,200
Other assets
$500
$750
Liabilities
$500
$1,000
Sales
$6,750
$7,200
Net income after tax*
$743
$1,008
Average age of fixed assets (years)
15
5
*Net income is after tax but before interest MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125. Which is true, when fixed asset costs are adjusted upward for inflation?
Babylon's RONA is 35.8%
Babylon's RONA is 26.3%
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Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below:
Ur
Babylon
Fixed assets, gross
$2,500
$4,000
Accumulated depreciation
$1,500
$1,200
Other assets
$500
$750
Liabilities
$500
$1,000
Sales
$6,750
$7,200
Net income after tax*
$743
$1,008
Average age of fixed assets (years)
15
5
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Sales revenue
Income
Divisional assets (beginning of year)
Current liabilities (beginning of year)
R&D expendituresa
Carolinas
$ 1,500
190
Northeast
$ 5,400
1,000
230
372
1,500
230
750
670
aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year.
Required:
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Req A1
Req A2
Evaluate the performance of the two divisions assuming Lasky uses return on investment (ROI).
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Operating expenses
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$
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$ 625,000
$ 800,000
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After-tax income
Divisional assets.
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O
South.
West.
South Division
$ 380,000
$ 20,000
$ 200,000
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$
282,000
$
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$
73,320
$
39,480
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$
174,440
$
84,600
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$
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Required:
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b. What is the Seed Division’s break-even in sales dollars?
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Current liabilities (beginning of year)
R&D expenditures a
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$ 1,500
190
1,000
230
750
Northeast
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372
1,500
230
670
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Required:
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Req A2
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Carolinas
Northeast
ROI
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$
301,300
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133,400
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$
112,125
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58,765
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53,360
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169,600
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57,200
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112,400
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O $121,000
O $232,800
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$ 900
$ 4,200
Income
170
372
Divisional assets (beginning of year)
1,000
1,500
Current liabilities (beginning of year)
170
170
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450
370
aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year.
Required:
a-1. Evaluate the performance of the two divisions assuming Lasky Manufacturing uses residual income.
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$ 4,200
Income
170
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450
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