Albrecht 19.pdf - Marriott School

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EOC | Controlling Cost, Profit, and Investment Centers Chapter 19 999
P 19-61
LO4
ROI and Residual Income
San Jose Cupertino Los Altos Saratoga
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000 $750,000 $ (i) $950,000
Operating profit . . . . . . . . . . . . . . . . . . . . . $ (a) $175,000 $ (j) $ (m)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $150,000 $ (e) $333,333 $ (n)
Profit margin ratio . . . . . . . . . . . . . . . . . . . . 20% (f) 12% (o)
Asset turnover ratio . . . . . . . . . . . . . . . . . . . (b) 0.75 (k) 3.0
ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) (g) (l) 18%
Minimum accepted rate of return . . . . . . . . . 15% (h) 16% 14%
Residual income . . . . . . . . . . . . . . . . . . . . . $ (d) $ 15,000 $ 16,000 $ (p)
Required:
Compute the missing data, labeled (a) through (p).
P 19-62
LO4
Measuring Performance: Residual Income and ROI
The gaming division of Nevada Corporation had income of $550,000 and total assets of
$3 million in 2009. The figures are expected to be similar in 2010. The manager of the
gaming division has an opportunity to purchase some new gambling machines for $250,000.
He concludes that the new machines would increase annual operating profit by $44,000.
Required:
1. Calculate the current ROI and the expected return on the proposed investment.
2. Calculate the gaming division’s current residual income and the expected residual income
on the proposed investment. (Assume that the division’s minimum accepted rate
of return is 17%.)
3. Should the new machines be purchased:
a. If the division uses the ROI method
b. If the division uses the residual income method
P 19-63
LO4
ROI and Residual Income
The manager of the manufacturing division of Minolta Company is evaluated on a residual income
basis. He is in the process of evaluating three investment proposals.
a. Pay $500,000 for a new machine that will increase production substantially. This will result
in an increased income of $80,000 annually.
b. Pay $350,000 for a new machine that will reduce labor costs by $70,000 annually.
c. Pay $800,000 for a new machine that will increase annual operating profit by $115,000.
The manufacturing division currently has total assets of $1.2 million and operating profit of
$200,000. Its minimum accepted rate of return is 15%.
Required:
1. Evaluate the three investment proposals independently, and determine which should be
accepted.
2. Assuming that the division manager is evaluated on the basis of the division’s ROI, determine
whether each of the proposals should be accepted or rejected.
EXPANDED
material
P 19-64
LO5, LO6
Manufacturing Overhead Variances
Engraph Manufacturing Company uses standard direct labor hours as a basis for charging
manufacturing overhead to Work-in-Process Inventory. The following data were taken from
the records:
(continued)