The Empire Hotel is a full-service hotel in a large city. Empire is organized into three departments that are treated as investment centers. Budget information for the coming year for these three departments is shown as follows. The managers of each of the departments are evaluated and bonuses are awarded each year based on ROI. Average investment Sales revenue Operating expenses Operating earnings Empire Hotel Hotel Rooms $ 10,000,000 $ 11,250,000 8,685,000 $ 2,565,000 Restaurants $ 6,250,000 $ 2,500,000 1,582,500 $ 917,500 Health Spa $ 1,250,000 $ 800,000 616,000 $ 184,000 Required a. Compute the ROI for each department. Use the DuPont method to analyze the return on sales and capital turnover. Assume the Health Spa is considering installing new exercise equipment. Upon investigating, the manager of the division finds that the equipment would cost $77,000 and that operating earnings would increase by $13.860 per year as a result of the new equipment. b-1. What is the ROI of the investment in the new exercise equipment? What impact does the investment in the exercise equipment have on the Health Spa's ROI? b-2. Would the manager of the Health Spa be motivated to undertake such an investment? c-1. Compute the residual income for each department if the minimum required return for the Empire Hotel is 16 percent. c-2. What would be the impact of the investment in part b on the Health Spa's residual income?
The Empire Hotel is a full-service hotel in a large city. Empire is organized into three departments that are treated as investment centers. Budget information for the coming year for these three departments is shown as follows. The managers of each of the departments are evaluated and bonuses are awarded each year based on ROI. Average investment Sales revenue Operating expenses Operating earnings Empire Hotel Hotel Rooms $ 10,000,000 $ 11,250,000 8,685,000 $ 2,565,000 Restaurants $ 6,250,000 $ 2,500,000 1,582,500 $ 917,500 Health Spa $ 1,250,000 $ 800,000 616,000 $ 184,000 Required a. Compute the ROI for each department. Use the DuPont method to analyze the return on sales and capital turnover. Assume the Health Spa is considering installing new exercise equipment. Upon investigating, the manager of the division finds that the equipment would cost $77,000 and that operating earnings would increase by $13.860 per year as a result of the new equipment. b-1. What is the ROI of the investment in the new exercise equipment? What impact does the investment in the exercise equipment have on the Health Spa's ROI? b-2. Would the manager of the Health Spa be motivated to undertake such an investment? c-1. Compute the residual income for each department if the minimum required return for the Empire Hotel is 16 percent. c-2. What would be the impact of the investment in part b on the Health Spa's residual income?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The Empire Hotel is a full-service hotel in a large city. Empire is organized into three departments that are treated as investment
centers. Budget information for the coming year for these three departments is shown as follows. The managers of each of the
departments are evaluated and bonuses are awarded each year based on ROI.
Average investment
Sales revenue
Operating expenses
Operating earnings
Empire Hotel
Hotel Rooms
$ 10,000,000
$ 11,250,000
8,685,000
$ 2,565,000
Restaurants
$ 6,250,000
$ 2,500,000
1,582,500
$ 917,500
Health Spa
$ 1,250,000
$ 800,000
616,000
$ 184,000
Required
a. Compute the ROI for each department. Use the DuPont method to analyze the return on sales and capital turnover.
Assume the Health Spa is considering installing new exercise equipment. Upon investigating, the manager of the division finds that the
equipment would cost $77,000 and that operating earnings would increase by $13,860 per year as a result of the new equipment.
b-1. What is the ROI of the investment in the new exercise equipment? What impact does the investment in the exercise equipment
have on the Health Spa's ROI?
b-2. Would the manager of the Health Spa be motivated to undertake such an investment?
c-1. Compute the residual income for each department if the minimum required return for the Empire Hotel is 16 percent.
c-2. What would be the impact of the investment in part b on the Health Spa's residual income?
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Step 1: Define ROI
VIEWStep 2: Requirement a - Computation of ROI
VIEWStep 3: Requirement b-1 Computation of ROI in new equipment and Health Spa
VIEWStep 4: Requirement b-2
VIEWStep 5: Requirement c-1 Computation of residual income
VIEWStep 6: Requirement c - 2 Impact of investment on Health Spa residual income
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