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 support department allocations, along with asset information 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
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 the Specialty Products Division manager rejected the new product line.
- a. Determine the return on investment for the Specialty Products Division for the past year.
- b. Determine the Specialty Products Division manager’s bonus for the past year.
- c. Determine the estimated return on investment for the new product line. Round percentages to one decimal place and the investment turnover to two decimal places.
- d. Why might the manager of the Specialty Products Division decide to reject the new product line? Support your answer by determining the projected return on investment for 20Y6, assuming that the new product line was launched in the Specialty Products Division and 20Y6 actual operating results were similar to those of 20Y5.
- e. Suggest an alternative performance measure for motivating division managers to accept new investment opportunities that would increase the overall company income and return on investment.
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Chapter 24 Solutions
Financial And Managerial Accounting
- 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: Retail Division 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.arrow_forwardHamilton Corp. is a reinsurance and financial services company. Hamilton strongly believes in evaluating the performance of its stand-alone divisions using financial metrics such as ROI and residual income. For the year ended December 31, 2017, Hamilton’s CFO received the following information about the performance of the property/casualty division:Sales revenues $ 900,000Operating income 225,000Total assets 1,500,000Current liabilities 300,000Debt (interest rate: 5%) 400,000Common equity (book value) 500,000For the purposes of divisional performance evaluation, Hamilton defines investment as total assets and income as operating income (that is, income before interest and taxes). The firm pays a flat rate of 25% in taxes on its income. Q. Hamilton’s CFO has heard about EVA and is curious about whether it might be a better measure to use for evaluating division managers. Hamilton’s four divisions have similar risk characteristics. Hamilton’s debt trades at book value while its equity…arrow_forwardThe vice president of operations of Pavone Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Business Division Consumer Division Sales $2,160,000 $2,520,000 Cost of goods sold 1,270,000 1,330,000 Operating expenses 652,400 837,200 Invested assets 744,828 2,100,000 Required: 1. Prepare condensed divisional income statements for the year ended December 31, assuming that there were no service department charges. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. If required, round your final answers to one decimal place. 3. If management wants a minimum acceptable return of 17.00%, determine the residual income for each division. Use the minus sign to indicate a negative income. Round final answers to nearest…arrow_forward
- Lasky Manufacturing has two divisions: Carolinas and Northeast. Lasky has a cost of capital of 7.5 percent. Selected financial information (in thousands of dollars) for the first year of business follows: Sales revenue Income Divisional assets (beginning of year) Current liabilities (beginning of year) R&D expendituresa aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year. Required: a-1. Evaluate the performance of the two divisions assuming Lasky Manufacturing uses economic value added (EVA). a-2. Which division had the better performance? Complete this question by entering your answers in the tabs below. Req A1 Divisions Req A2 Carolinas Northeast Carolinas $ 1,100 190 1,000 190 550 Evaluate the performance of the two divisions assuming Lasky Manufacturing uses economic value added (EVA). Note: Note: Enter answers in thousands of dollars. Round your answers to 1 decimal place. EVAarrow_forwardLasky Manufacturing has two divisions: Carolinas and Northeast. Lasky has a cost of capital of 7.5 percent. Selected financial information (in thousands of dollars) for the first year of business follows: Sales revenue Income Divisional assets (beginning of year) Current liabilities (beginning of year) R&D expendituresa aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year. Required: a-1. Evaluate the performance of the two divisions assuming Lasky uses return on investment (ROI). a-2. Which division had the better performance? Complete this question by entering your answers in the tabs below. Req A1 Divisions Carolinas $2,400 160 1,000 320 1,200 Req A2 Carolinas Northeast Evaluate the performance of the two divisions assuming Lasky uses return on investment (ROI). Note: Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). Northeast $ 7,200 372 1,500 320 1,120 ROI % %arrow_forwardLasky Manufacturing has two divisions: Carolinas and Northeast. Lasky has a cost of capital of 7.5 percent. Selected financial information (in thousands of dollars) for the first year of business follows: Sales revenue Income Divisional assets (beginning of year) Current liabilities (beginning of year) R&D expendituresa aR&D is assumed to benefit two periods. All R&D is spent at the beginning of the year. Required: a-1. Evaluate the performance of the two divisions assuming Lasky uses return on investment (ROI). a-2. Which division had the better performance? Req A1 Complete this question by entering your answers in the tabs below. Divisions Carolinas $ 2,100 170 1,000 290 1,050 Req A2 Carolinas Northeast Northeast $ 6,600 372 1,500 290 970 Evaluate the performance of the two divisions assuming Lasky uses return on investment (ROI). Note: Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). ROI % %arrow_forward
- The condensed income statement for the Consumer Products Division of Tri-State Industries Inc. is as follows (assuming no support department allocations): The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that 143,750,000 of assets have been invested in the Consumer Products Division. b. If expenses could be reduced by 3,450,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division?arrow_forwardForchen, Inc., provided the following information for two of its divisions for last year: Required: 1. For the Small Appliances Division, calculate: a. Average operating assets b. Margin c. Turnover d. Return on investment (ROI) 2. For the Cleaning Products Division, calculate: a. Average operating assets b. Margin c. Turnover d. Return on investment (ROI) 3. What if operating income for the Small Appliances Division was 2,000,000? How would that affect average operating assets? Margin? Turnover? ROI? Calculate any changed ratios (round to four significant digits).arrow_forwardThe three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for the prior year: a. Which division is making the best use of invested assets and should be given priority for future capital investments? b. b. Assuming that the minimum acceptable return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions? Explain. c. c. Identify opportunities for improving the companys financial performance.arrow_forward
- Oscar Clemente is the manager of Forbes Division of Pitt, Inc., a manufacturer of biotech products. Forbes Division, which has $4.18 million in assets, manufactures a special testing device. At the beginning of the current year, Forbes invested $5.12 million in automated equipment for test machine assembly. The division’s expected income statement at the beginning of the year was as follows. Sales revenue $ 16,150,000 Operating costs Variable 2,100,000 Fixed (all cash) 7,640,000 Depreciation New equipment 1,530,000 Other 1,360,000 Division operating profit $ 3,520,000 A sales representative from LSI Machine Company approached Oscar in October. LSI has for $6.27 million a new assembly machine that offers significant improvements over the equipment Oscar bought at the beginning of the year. The new equipment would expand division output by 10 percent while reducing cash fixed costs by 5 percent. It would be depreciated…arrow_forwardHardin Company is a division of a major corporation. The following data are for the latest year of operations: Sales $ 19,600,000 Net operating income $ 470,400 Average operating assets $ 5,000,000 The company's minimum required rate of return 10 % Required: What is the division's residual income?arrow_forwardThe Custodial Division of Clark's Corporate Services (CCS) has assets of $1.2 million. During the past year, the division had profits of $228,000. CCS has a cost of capital of 7.5 percent. Ignore taxes. Required: a. Compute the divisional ROI for the Custodial Division. b. Compute the divisional RI for the Custodial Division. Complete this question by entering your answers in the tabs below. Required A Required B Compute the divisional ROI for the Custodial Division. Divisional ROI % Required A Required B >arrow_forward
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