Ch. 11 Part 2 In-class activities Week 9 solutions
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Exercise 11-7 Computing and Interpreting Return on Investment Selected operating data on the two divisions of Prism Company are given below:
Division
Eastern
Western
Sales
$ 800,000 $ 1,850,000 Average operating assets
$ 300,000 $ 400,000 Operating income
$ 70,000 $ 115,000 Plant and equipment
$ 125,000 $ 200,000 Required:
Margin
Turnover
ROI Formula:
Eastern ROI = Western ROI = 1. Compute the rate of return for each division using the ROI formula stated in term
2. Which divisional manager seems to be doing the better job?
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ms of margin and turnover.
Exercise 11-13 Effects of Changes in Sales, Expenses, and Assets on ROI
CommercialServices.com provides business-to-business services on the Internet. D
concerning the most recent year appear below:
Sales
$ 3,000,000 Net operating income
$ 150,000 Average operating assets
$ 750,000 Required:
1. Compute the company's margin, turnover and return on investment (ROI).
Margin
Turnover
ROI Formula:
X
Margin = Turnover = ROI = 2. The entrepreneur who founded the company is convinced that sales will increase
by 50% and that net operating income will increase by 200%, with no increase in
Sales
Net operating income
Average operating assets
Margin = Turnover = ROI = 3. The Chief Financial Officer of the company believes a more realistic scenario wo
a $1,000,000 increase in sales, requiring a $250,000 increase in average operat
with a resulting $200,000 increase in net operating income. What would be the c
Sales
Net operating income
Average operating assets
Margin = operating assets. What would be the company’s ROI? ROI in this scenario?
Turnover = ROI =
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Data e next year n average ould be ting assets, company’s
Exercise 11-8 Contrasting Return on Investment and Residual Income
Ferris Ltd. of Australia has two divisions, one in Perth and one in Darwin. Selected data on the two divisions follow:
Division
Perth
Darwin
Sales
$ 9,000,000 $ 20,000,000 Operating income
$ 630,000 $ 1,800,000 Average operating assets
$ 3,000,000 $ 10,000,000 Required:
Margin
Turnover
ROI Formula:
Operating income
X
Sales
Sales
Average operating assets
Perth ROI = 21%
Darwin ROI = 18%
minimum required rate of return for any division is 16%. Compute the residual inc
for each division.
Perth
Darwin
Operating income
$ 630,000 $ 1,800,000 *
Minimum required return
480,000 1,600,000 Residual income
$ 150,000 $ 200,000 *
No
because Darwin is much larger than Perth
1. Compute the ROI for each division.
2. Assume that the company evaluates performance using residual income and tha
3. Is the Darwin Division’s greater residual income an indication that it is better man
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come at the naged?
Exercise 11-12 Evaluating New Investments Using Return on Investment and Res
Three divisions of Jameson Co. report the following sales and operating data:
Spa Services
Sales
$ 600,000 $ 750,000 $ 400,000 Average operating assets
$ 200,000 $ 250,000 $ 100,000 Operating income
$ 30,000 $ 37,500 $ 24,000 Minimum RRR
10%
12%
10%
Fitness Training
Accept
Spa Services
Accept
Athletic Wear
Reject
opportunity?
Fitness Training
Accept
Spa Services
Accept
Athletic Wear
Accept
Fitness Training
Athletic Wear 3. Assume that each division is presented with an investment opportunity that would yie
a. If performance is being measured by ROI, which division or divisions will probably ac
b. If performance is being measured by residual income, which division or divisions will
sidual Income
eld a rate of return of 17%.
ccept the opportunity?
probably accept the
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Exercise 11-9:
A family friend has asked for your help in analyzing the operations of three companie
same service sector industry. Supply the missing data in the following table:
Company
A
B
Sales
$ 400,000 $ 750,000 Operating income
$ 32,000 $ 45,000 Average operating assets
$ 160,000 $ 250,000 Return on investment
20%
18%
Minimum required rate of return:
Percentage
15%
20%
Dollar amount
$ 24,000 $ 50,000 Residual income (loss)
$ 8,000 -$ 5,000
es operating in the C
$ 600,000 9.00 $ 24,000 1.00 $ 150,000 16%
12%
$ 18,000 1.00 $ 6,000 1.00
Total grade 1.00 1.00 1.00 1.00 1.00 1.00
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Exercise 11-10:
Provide the missing data in the following table:
Division
Fab
Consulting
IT
Sales
$ 800,000 $ 650,000 $ 500,000 Operating income
$ 72,000 $ 26,000 $ 40,000 Average operating assets
$ 400,000 $ 130,000 $ 200,000 Margin
9%
4%
8%
Turnover
2.00 5.00 2.50 Return on investment
18%
20%
20%
9.00 Total grade 1.00 1.00 1.00 1.00 1.00 1.00
1.00 1.00 1.00
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Exercise 11-11:
FitPlus is a regional chain of health clubs. Each club’s manager has the authority to make i
and is evaluated based largely on ROI. FitPlus Club 52 reported the following results for th
Sales
$ 750,000 Operating income
$ 26,250 Average operating assets
$ 80,000 Required:
The following questions are to be considered independently.
Margin
Turnover
ROI Formula:
Operating income
X
Sales
Sales
Average operating assets
Margin = 3.50%
Turnover = 9.38 ROI = 32.81%
increases by $6,000. Further assume that this is possible without any increase in operatin
club’s ROI be?
Sales
$ 830,000 Operating income
$ 32,250 Average operating assets
$ 80,000 Margin = 3.89%
Turnover = 10.38 ROI = 40.31%
Sales
$ 750,000 Operating income
$ 29,450 Average operating assets
$ 80,000 Margin = 3.93%
Turnover = 9.38 ROI = 36.81%
or operating income. What would the club’s ROI be?
Sales
$ 750,000 Operating income
$ 26,250 1. Compute the club’s ROI. 2. Assume that the manager of the club is able to increase sales by $80,000 and that as a re
3. Assume that the manager of the club is able to reduce expenses by $3,200 without any c
operating assets. What would the club’s ROI be? 4. Assume that the manager of the club is able to reduce operating assets by $20,000 witho
Average operating assets
$ 60,000 Margin = 3.50%
Turnover = 12.50 ROI = 43.75%
investments as needed he past year:
7.00 Average ope
0.25 Operating i
0.25 Sales
0.50 0.50 0.50 ng assets. What would the 0.50 0.50 0.50 0.50 0.50 0.50 esult operating income change in sales or out any change in sales
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0.50 0.50 0.50
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Total grade 0.25 0.25
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Student Name
0
Grade
Out of
Exercise 11-1
#REF! 4.50 Exercise 11-2
#REF! 7.00 Exercise 11-6
#REF! 3.50 Exercise 11-7
- 5.00 Exercise 11-8
6.50 6.50 Exercise 11-12
6.00 6.00 Total grade
#REF! 32.50
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empts
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rce
mpletion
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Children
educatio Personali Cross-
n
ty
cultural
Spouse's
willingne allowanc
ss to
travel
Spouseoverseas
job
assistanc
compete Prior
ncies internati
onal
experienc
Age
Host
country
housing
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care plan
Length of
the
foreign
assignme Career
nt
and
repatriati
Receptivity
to
Internation
al Careers
Family
status
Gender
Marital
status
Educatio
n
Destinati
Opportun on
on Company ities for country
planning culture
career
support
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