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Two different business units of Skysong Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000 investment. The business units had complete autonomy to spend the money on whatever investment would best serve their locations, but they were motivated to keep ROI trends moving in a positive direction. The following financial statements reflect each business unit's profitability and financial position at the end of the prior calendar year. Skysong Corporation uses a 7% minimum required rate of return. It is financed 70% with debt that carries an average 6% interest rate, and it averages an 8% cost of equity. Sales COGS Gross margin Selling expenses Administrative expenses Operating income Income tax expense Operating income after-tax Downtown $350,000 221,000 129,000 36,000 60,000 9,900 Uptown $452,000 $23,100 291,000 161,000 76,000 $33,000 $45,000 13,500 $31,500 40,000

Two different business units of Skysong Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000 investment. The business units had complete autonomy to spend the money on whatever investment would best serve their locations, but they were motivated to keep ROI trends moving in a positive direction. The following financial statements reflect each business unit's profitability and financial position at the end of the prior calendar year. Skysong Corporation uses a 7% minimum required rate of return. It is financed 70% with debt that carries an average 6% interest rate, and it averages an 8% cost of equity. Sales COGS Gross margin Selling expenses Administrative expenses Operating income Income tax expense Operating income after-tax Downtown $350,000 221,000 129,000 36,000 60,000 9,900 Uptown $452,000 $23,100 291,000 161,000 76,000 $33,000 $45,000 13,500 $31,500 40,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Two different business units of Skysong Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000 investment. The business units had complete autonomy to spend the money on whatever investment would best serve their locations, but they were motivated to keep ROI trends moving in a positive direction. The following financial statements reflect each business unit's profitability and financial position at the end of the prior calendar year. Skysong Corporation uses a 7% minimum required rate of return. It is financed 70% with debt that carries an average 6% interest rate, and it averages an 8% cost of equity. Sales COGS Gross margin Selling expenses Administrative expenses Operating income Income tax expense Operating income after-tax Show Transcribed Text Assets Cash Accounts receivable Inventory Fixed assets, net Long-term investments Total assets Liabilities and Equity Accounts payable Notes payable, long-term Mortgage payable Retained earnings Total liabilities and equity Downtown $350,000 221,000 129,000 36,000 40,000 76,000 $33,000 $45,000 13,500 60,000 c 9,900 $23,100 $29,000 12,000 20,000 217,000 40,000 $19,000 45,000 197,000 Uptown $452,000 291,000 225,000 58,000 $318,000 $358,000 57,000 161,000 $318,000 $31,500 $34,000 19,000 22,000 $41,000 30,000 230,000 57,000 $358,000
Transcribed Image Text:Two different business units of Skysong Corporation were engaged in a friendly competition to see which location would make the best use of a $49,000 investment. The business units had complete autonomy to spend the money on whatever investment would best serve their locations, but they were motivated to keep ROI trends moving in a positive direction. The following financial statements reflect each business unit's profitability and financial position at the end of the prior calendar year. Skysong Corporation uses a 7% minimum required rate of return. It is financed 70% with debt that carries an average 6% interest rate, and it averages an 8% cost of equity. Sales COGS Gross margin Selling expenses Administrative expenses Operating income Income tax expense Operating income after-tax Show Transcribed Text Assets Cash Accounts receivable Inventory Fixed assets, net Long-term investments Total assets Liabilities and Equity Accounts payable Notes payable, long-term Mortgage payable Retained earnings Total liabilities and equity Downtown $350,000 221,000 129,000 36,000 40,000 76,000 $33,000 $45,000 13,500 60,000 c 9,900 $23,100 $29,000 12,000 20,000 217,000 40,000 $19,000 45,000 197,000 Uptown $452,000 291,000 225,000 58,000 $318,000 $358,000 57,000 161,000 $318,000 $31,500 $34,000 19,000 22,000 $41,000 30,000 230,000 57,000 $358,000
Each location is considering one of the following two investments in long-term assets, where the asset would be depreciated using the straight-line method over its useful life. 1. 2. (a) $49,000 for an updated and upgraded pizza oven that will allow for faster cooking times and less energy usage, with an estimated improvement in operating income of $15,000 each year (before depreciation) over its 7-year life. Show Transcribed Text $49,000 to update the atmosphere and seating capacity of the restaurant, with an anticipated operating income increase of $12,000 per year (before depreciation) over a 10-year useful life, when it will be updated again. * Your answer is incorrect. Calculate each location's ROI for last year, using total operating assets as the denominator. Here, all assets except long-term investments are considered operating assets. (Round answers to 4 decimal places, e.g. 0.1526.) (b) Divisional ROI last year Show Transcribed Text ROI Option 1 Downtown Calculate the ROI of each potential investment on its own. (Round answers to 4 decimal places, e.g. 0.1526.) ROI 0.0831 Downtown Option 2 Uptown If each business unit is motivated to improve its own ROI, which of these investments (if either) would each manager choose? 0.1050 Assuming each moves ahead with your recommendation, calculate the total ROI each location would report at the end of next year, assuming all other operating aspects are unchanged from the prior year. (Round answers to 4 decimal places, e.g. 0.1526.) Uptown
Transcribed Image Text:Each location is considering one of the following two investments in long-term assets, where the asset would be depreciated using the straight-line method over its useful life. 1. 2. (a) $49,000 for an updated and upgraded pizza oven that will allow for faster cooking times and less energy usage, with an estimated improvement in operating income of $15,000 each year (before depreciation) over its 7-year life. Show Transcribed Text $49,000 to update the atmosphere and seating capacity of the restaurant, with an anticipated operating income increase of $12,000 per year (before depreciation) over a 10-year useful life, when it will be updated again. * Your answer is incorrect. Calculate each location's ROI for last year, using total operating assets as the denominator. Here, all assets except long-term investments are considered operating assets. (Round answers to 4 decimal places, e.g. 0.1526.) (b) Divisional ROI last year Show Transcribed Text ROI Option 1 Downtown Calculate the ROI of each potential investment on its own. (Round answers to 4 decimal places, e.g. 0.1526.) ROI 0.0831 Downtown Option 2 Uptown If each business unit is motivated to improve its own ROI, which of these investments (if either) would each manager choose? 0.1050 Assuming each moves ahead with your recommendation, calculate the total ROI each location would report at the end of next year, assuming all other operating aspects are unchanged from the prior year. (Round answers to 4 decimal places, e.g. 0.1526.) Uptown
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