81)
LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions.
The division managers are evaluated, in part, on the basis of the change in their return on invested assets.
Operating results for the Packer Division for 20X5 are budgeted as follows:
Sales
$5,000,000
Less variable costs
2,500,000
Contribution margin
2,500,000
Less fixed expenses
1,800,000
Net operating income
$
700,000
Operating assets for the division are currently $3,600,000. For 2007, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price.
Required:
a.What is the effect on ROI of accepting the new product line?
b.If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.
81)
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82)
The Irnakk Corporation manufactures iPod covers in Canada and China.
The operations are organized as decentralized divisions.
The following information is available for 2008:
Canada Division China Division
Operating income
$2,400,00011,400,000 yuan
Total assets
$16,000,00075,000,000 yuan
The exchange rate at the time of Irnakk's investment in China on December 31, 2007 was 7.5 Chinese yuan = $1 Canadian.
During 2008, the yuan declined steadily in value and the exchange rate on December 31, 2008
was 8.5 yuan = $1 Canadian.
The average exchange rate during 2008 was 8 yuan = $1 Canadian.
Required:
a.
Calculate the Canadian Division's ROI for 2008 based on dollars.
b.
Calculate the Chinese Division's ROI for 2008 based on dollars.
c.
Which of Irnakk's two divisions earned the better ROI in 2008?
Explain your answer, complete with supporting calculations.
82)
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83)
Provide the missing data for the following situations:
RedWhiteBlue
DivisionDivisionDivision
Sales$
?$10,000,000$
?
Net operating income200,000$
400,000$
288,000
Total assets$
?$1,600,000
Return on investment0.160.10?
Return on sales0.04?0.12 83)
_____________
84)
National Can Company has three divisions, Eastern, Midwestern, and Western. Because of very different accounting methods and inflation rates in different countries it is considering multiple evaluation measures. Information gathered about the divisions for 2001 follows:
Assets Income
Book valueCurrent value Book valueCurrent value
Eastern$ 600,000$ 900,000 $120,000$110,000
Midwestern700,000 700,000120,000 120,000
Western 1,000,000 1,400,000200,000 180,000
The company is currently using a required rate of return of 15 percent.
Required:
a.Compute the ROI using both book value and current value for all divisions. Round to three decimal places.
b.Compute residual income using book value and current value for all divisions.
c.Does book value or current value provide the better basis for performance evaluation? Why? Which division is the most successful? 84)
_____________
85)
A multinational established a division in a South American country as a subsidiary corporation, with an initial investment in total assets of 13 million CU's (the local currency is CU's), which cost the company $3,250,000 Canadian at the time. The company sent an experienced manager to run the division, and gave her a target of 13% required rate of return, promising a bonus if this was met and/or exceeded.
After one year, the subsidiary manager was pleased to report a 20% ROI.
You have been able to determine the following data pertaining to the subsidiary:
?
Exchange rate at end of year was 8 CU's to 1 Cdn dollar
?
Operating income was earned evenly throughout the year
?
The exchange rate changed approximately evenly throughout the year
Required:
a.Calculate the subsidiary's income in CU's.
b.Calculate the subsidiary's ROI in Canadian dollars.
c.Calculate the subsidiary's RI in Canadian dollars. 85)
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