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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition

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Chapter 11, Problem 43P
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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

Solutions

Chapter
Section
Problem 1DQ
Problem 2DQ
Problem 3DQ
Problem 4DQ
Problem 5DQ
Problem 6DQ
Problem 7DQ
Problem 8DQ
Problem 9DQ
Problem 10DQ
Problem 11DQ
Problem 1MCQ
Problem 2MCQ
Problem 3MCQ
Problem 4MCQ
Problem 5MCQ
Problem 6MCQ
Problem 7MCQ
Problem 8MCQ
Problem 9MCQ
Problem 10MCQ
Problem 11MCQ
Problem 12MCQ
Problem 13BEA
Problem 14BEA
Problem 15BEA
Problem 16BEA
Problem 17BEA
Problem 18BEA
Problem 19BEB
Problem 20BEB
Problem 21BEB
Problem 22BEB
Problem 23BEB
Problem 24BEB
Problem 25E
Problem 26E
Problem 27E
Problem 28E
Problem 29E
Problem 30E
Problem 31E
Problem 32E
Problem 33E
Problem 34E
Problem 35E
Problem 36E
Problem 37E
Problem 38E
Problem 39E
Problem 40P
Problem 41P
Problem 42P
Problem 43P
Problem 44P
Problem 45P
Problem 46P
Problem 47P
Problem 48P
Problem 49P
Problem 50C
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
86 views

Return on Investment and Economic Value Added Calculations with Varying Assumptions

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 7%. (Note: Round all answers to four decimal places.)

Required:

  1. 1. Compute the ROI for the division without the investment.
  2. 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.
  3. 3. CONCEPTUAL CONNECTION Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment?
  4. 4. CONCEPTUAL CONNECTION Compute the margin and turnover ratios for the division with the new investment. How do these compare with the old ratios?
  5. 5. CONCEPTUAL CONNECTION Compute the EVA of the division with and without the investment. Should the manager decide to make the knitting machine investment?

1.

To determine

Calculate ROI for the division without investment.

Explanation

Return on Investment (ROI):

Return on investment can be defined as the amount of profit earned by the company on per dollar of investment. It can be computed by dividing operating income by the average operating assets.

Use the following formula to calculate ROI for division without investment:

ROI=Operating IncomeAverage operating assets

Sub

2.

To determine

Calculate margin and turnover ratios without investment. Also, describe the product of margin and turnover is equal to the ROI computed.

3.

To determine

Calculate ROI with new investment. Also, describe whether the manager should approve the investment.

4.

To determine

Calculate margin and turnover ratios with new investment.

5.

To determine

Calculate EVA with and without the division. Describe whether the manager should make the knitting machine investment.

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Ch-11 P-1DQCh-11 P-2DQCh-11 P-3DQCh-11 P-4DQCh-11 P-5DQCh-11 P-6DQCh-11 P-7DQCh-11 P-8DQCh-11 P-9DQCh-11 P-10DQ
Ch-11 P-11DQCh-11 P-1MCQCh-11 P-2MCQCh-11 P-3MCQCh-11 P-4MCQCh-11 P-5MCQCh-11 P-6MCQCh-11 P-7MCQCh-11 P-8MCQCh-11 P-9MCQCh-11 P-10MCQCh-11 P-11MCQCh-11 P-12MCQCh-11 P-13BEACh-11 P-14BEACh-11 P-15BEACh-11 P-16BEACh-11 P-17BEACh-11 P-18BEACh-11 P-19BEBCh-11 P-20BEBCh-11 P-21BEBCh-11 P-22BEBCh-11 P-23BEBCh-11 P-24BEBCh-11 P-25ECh-11 P-26ECh-11 P-27ECh-11 P-28ECh-11 P-29ECh-11 P-30ECh-11 P-31ECh-11 P-32ECh-11 P-33ECh-11 P-34ECh-11 P-35ECh-11 P-36ECh-11 P-37ECh-11 P-38ECh-11 P-39ECh-11 P-40PCh-11 P-41PCh-11 P-42PCh-11 P-43PCh-11 P-44PCh-11 P-45PCh-11 P-46PCh-11 P-47PCh-11 P-48PCh-11 P-49PCh-11 P-50C

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