8-1 - Please solve parts 1 through 3 Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $310,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project—adding knitting machines to produce gaiters—that requires an additional investment of $600,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $600,000 and ending operating assets by $400,000. Assume that the actual cost of capital for the company is 8%. Required: 1.  Compute the ROI for the division without the investment. Round your answer to two decimal places.  % 2.  Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. Round your answers to two decimal places. Margin fill in the blank 2 % Turnover fill in the blank 3 ROI fill in the blank 4 % 3.  Conceptual Connection: Compute the ROI for the division with the new investment. Round your answer to one decimal place.  % Do you think the divisional manager will approve the investment? 4.  Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios? Margin fill in the blank 7 % The ratio value increased  Turnover fill in the blank 9 The ratio value stayed the same  5.  Conceptual Connection: Compute the EVA of the division with and without the investment. EVA without the investment   EVA with the investment   Should the manager decide to make the knitting machine investment?

Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter11: Performance Evaluation And Decentralization
Section: Chapter Questions
Problem 43P: Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products...
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8-1 - Please solve parts 1 through 3

Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of $310,000 based on sales of $3.45 million. Without any new investments, the division will have average operating assets of $3 million. The division is considering a capital investment project—adding knitting machines to produce gaiters—that requires an additional investment of $600,000 and increases net income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning operating assets by $600,000 and ending operating assets by $400,000. Assume that the actual cost of capital for the company is 8%.

Required:

1.  Compute the ROI for the division without the investment. Round your answer to two decimal places.
 %

2.  Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. Round your answers to two decimal places.

Margin fill in the blank 2 %
Turnover fill in the blank 3
ROI fill in the blank 4 %

3.  Conceptual Connection: Compute the ROI for the division with the new investment. Round your answer to one decimal place.
 %

Do you think the divisional manager will approve the investment?

4.  Conceptual Connection: Compute the margin and turnover ratios for the division with the new investment. Round your answers to two decimal places. How do these compare with the old ratios?

Margin fill in the blank 7 % The ratio value increased 
Turnover fill in the blank 9 The ratio value stayed the same 

5.  Conceptual Connection: Compute the EVA of the division with and without the investment.

EVA without the investment  
EVA with the investment  

Should the manager decide to make the knitting machine investment?

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