FINANCIAL+MANG.-W/ACCESS PRACTICE SET
13th Edition
ISBN: 9781337575614
Author: WARREN
Publisher: CENGAGE L
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Textbook Question
Chapter 23, Problem 23.5CP
Evaluating division performance
Last Resort Industries Inc. is a privately held diversified company with five separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no Service department charges, is as follows:
The manager of the Specialty Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of $14,400,000. A
The Specialty Products Division currently has $27.000.000 in invested assets, and Last Resort Industries Inc.’s overall rate of
The president is concerned that the manager of the Specialty Products Division rejected the addition of the new product line, even though all estimates indicated that the product line would be profitable and would increase overall company income. You have been asked to analyze the possible reasons why the Specialty Products Division manager rejected the new product line.
- 1. Determine the rate of return on investment for the Specialty Products Division for the past year.
- 2. Determine the Specialty Products Division manager’s bonus for the past year.
- 3. Determine the estimated rate of return on investment for the new product line. Round whole percents to one decimal place and investment turnover to two decimal places.
- 4. - Why might the manager of the Specialty Products Division decide to reject the new product line? Support your answer by determining the projected rate of return all investment for 2016, assuming that the new product line was launched in the Specialty Products Division, and 2016 actual operating results were similar to those of 2015.
- 5. Can you suggest an alternative performance measure for motivating division managers to accept new investment opportunities that would increase the overall company income and rate of return on investment?
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Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year:
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Wholesale Division
Operating income
$ 2,750,000
$ 6,250,000
Operating assets
$ 18,500,000
$ 38,500,000
Terra Company has set a target return on investment (ROI) of 14% for both divisions.
Which of the following statements is accurate?
Residual income for the wholesale division was $160,000.
Residual income for the wholesale division was $860,000.
Residual income for the retail division was $860,000.
None of these answers are correct.
Far Sight is a division of a major corporation. The following data are for the latest year of operations:
Sales
$24,480,000
Net operating Income
$1,738,080
Average operating assets
$6,000,000
The company’s minimum required rate of return
16%
Required: a. What is the division's return on investment (ROI)?b. What is the division's residual income?
Exercise 25.4 (Algo) ROI versus EVA Measures (LO25-2, LO25-3, LO25-4)
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual
eports from two of Bailey's divisions is shown provided below. The company's weighted-average cost of capital is 11 percent.
Division A
Division B
$6,220,000
$4
650,000
$ 1,060,000
$ 8,530,000
$ 1,850,000
$ 1,182,100
Total assets
Current liabilities
After-tax operating income
ROI
21%
13%
a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Compute the EVA for Division A and
Division B.
c. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $340,000 and
increase her divisional operating income by $34,000. Would she be motivated to invest in this project?
Comple
this question by entering your answers in the tabs below.
Required A
Required B
Based on ROI, Division A generates more profit per…
Chapter 23 Solutions
FINANCIAL+MANG.-W/ACCESS PRACTICE SET
Ch. 23 - Prob. 1DQCh. 23 - Differentiate between a profit center and an...Ch. 23 - Weyerhaeuser developed a system that assigns...Ch. 23 - What is the major shortcoming of using income from...Ch. 23 - In a decentralized company in which the divisions...Ch. 23 - How does using the return on investment facilitate...Ch. 23 - Why would a firm use a balanced scorecard in...Ch. 23 - Prob. 8DQCh. 23 - When is the negotiated price approach preferred...Ch. 23 - When using the negotiated price approach to...
Ch. 23 - Prob. 23.1APECh. 23 - Prob. 23.1BPECh. 23 - Service department charges The centralized...Ch. 23 - Service department charges The centralized...Ch. 23 - Income from operations for profit center Using the...Ch. 23 - Prob. 23.3BPECh. 23 - Prob. 23.4APECh. 23 - Profit margin, investment turnover, and ROI Briggs...Ch. 23 - Residual income The Consumer Division of Hernandez...Ch. 23 - Prob. 23.5BPECh. 23 - Transfer pricing The materials used by tile North...Ch. 23 - Transfer pricing The materials used by the...Ch. 23 - Budget performance reports for cost centers...Ch. 23 - Divisional income statements The following data...Ch. 23 - Service department charges and activity bases For...Ch. 23 - Prob. 23.4EXCh. 23 - Service department charges In divisional income...Ch. 23 - Service department charges and activity bases...Ch. 23 - Divisional income statements with service...Ch. 23 - Prob. 23.8EXCh. 23 - Prob. 23.9EXCh. 23 - Rate of return on investment The income from...Ch. 23 - Residual income Based on the data in Exercise...Ch. 23 - Determining missing items in return on investment...Ch. 23 - Prob. 23.13EXCh. 23 - Prob. 23.14EXCh. 23 - Prob. 23.15EXCh. 23 - Determining missing items from computations Data...Ch. 23 - Prob. 23.17EXCh. 23 - Prob. 23.18EXCh. 23 - Building a balanced scorecard Hit-n-Run Inc. owns...Ch. 23 - Decision on transfer pricing Materials used by the...Ch. 23 - Prob. 23.21EXCh. 23 - Budget performance report for a cost center...Ch. 23 - Prob. 23.2APRCh. 23 - Divisional income statements and rate of return on...Ch. 23 - Effect of proposals on divisional performance A...Ch. 23 - Prob. 23.5APRCh. 23 - Prob. 23.6APRCh. 23 - Prob. 23.1BPRCh. 23 - Prob. 23.2BPRCh. 23 - Prob. 23.3BPRCh. 23 - Prob. 23.4BPRCh. 23 - Prob. 23.5BPRCh. 23 - Prob. 23.6BPRCh. 23 - Prob. 23.1CPCh. 23 - Prob. 23.2CPCh. 23 - Evaluating divisional performance The three...Ch. 23 - Evaluating division performance over time The...Ch. 23 - Evaluating division performance Last Resort...
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