Chapter 3, Problem 3.21P

Problem 3.21

LO 3

Applications of ROI using the DuPont model; manufacturing versus service firm Manyops, Inc., is a manufacturing firm that has experienced strong competition in its traditional business. Management is considering joining the trend to the “service economy” by eliminating its manufacturing operations and concentrating on providing specialized maintenance services to other manufacturers. Management of Manyops, Inc., has had a target ROI of 1896 on an asset base that has averaged $7 million. To achieve this ROI, average total asset turnover of 3.0 was required. If the company shifts its operations from manufacturing to providing maintenance services, it is estimated that average total assets will decrease to $2 million.

Required:

a. Calculate net income, margin, and sales required for Manyops, Inc., to achieve its target ROI as a manufacturing firm.

b. Assume that the average margin of maintenance service firms is 2.5%, and that the average ROI for such firms is also 1896. Calculate the net income, sales, and total asset turnover that Manyops, Inc., will have if the change to services is made and the firm is able to earn an average margin and achieve an 1896 ROI.