3rd Edition

ISBN: 9780077826482

Author: Stacey M Whitecotton Associate Professor, Robert Libby, Fred Phillips Associate Professor

Publisher: McGraw-Hill Education

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Textbook Question

Chapter 10, Problem 10E

Determining the Impact of Various Transactions on Investment Turnover, ROI, Residual Income, and Profit Margin

Poseidon Corporation manufactures a variety of gear for water sports. Poseidon has three divisions: Lake, River, and Ocean. Each division is managed as an investment center. During the current year, the Ocean division experienced the following transactions:

a. A special order was accepted at a selling price significantly less than the ordinary selling price. The sale will not impact other sales because this was a one-time order and Ocean has excess capacity. The selling price was in excess of total variable costs.
b. One of three production managers in the Ocean Division submitted his resignation. The position will not be filled due to current efficiencies experienced in the production department.
c. Due to the popularity of open-ocean swimming during the Olympics, the company experienced a surge in sales during the summer months. Sales returned to their normal level for the remainder of the year.
d. Equipment costing $500,000 was purchased to replace fully depreciated, obsolete equipment.
e. The company’s after-tax cost of capital increased from 8 percent to 10 percent, with no effect on the minimum required rate of return.
f. The company’s effective tax rate decreased from 35 percent to 30 percent.

Required:
For each transaction listed in this exercise, determine the impact on investment turnover, return on investment, residual income, and economic value added. Use the following table to organize your answers. Use (I) for increase, (D) for decrease, (N) for no effect, or a question mark (?) if you’re unable to determine the impact of the transaction. Each transaction should be treated independently.
Chapter 10, Problem 10E, Determining the Impact of Various Transactions on Investment Turnover, ROI, Residual Income, and

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Chapter 10, Problem 9E

Chapter 10, Problem 13E

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Solution Summary: The author explains the concept of Return on Investment, Residual Income, and Economic Value added. Transactions and their impact on various financial factors are discussed.

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