ACTG 2P12 Chapter 25: Ratios
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Question: Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 pe...
Altoona Technologies, Inc. (ATI) has three divisions. ATI has a desired rate of return of 12.5 percent. The operating assets and income for each division are as follows:
Divisions | Operating Assets | Operating Income | |||||
Printer | $ | 540,000 | $ | 96,000 | |||
Copier | 810,000 | 90,000 | |||||
Fax | 360,000 | 54,000 | |||||
Total | $ | 1,710,000 | $ | 240,000 | |||
ATI headquarters has $120,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:
Expected ROIs for | ||
Divisions | Additional Investments | |
Printer | 14.0 | % |
Copier | 13.0 | % |
Fax | 12.0 | % |
Required
a-1. Calculate the ROI for each division.
a-2. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $120,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $120,000 of investment funds?
d. Which division offers the best investment opportunity for ATI?
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
(2) At the division level before the additional investment.
(3) At the investment level.
(4) At the division level after the additional investment.
ReqG1
residual income |
ReqG2 to G4:
residual income (loss) | ||
(2) | Printer Division | |
Copier Division | ||
Fax Division | ||
(3) | Printer Division | |
Copier Division | ||
Fax Division | ||
(4) | Printer Division | |
Copier Division | ||
Fax division |
âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â |
Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the companyâs Office Products Division for the most recent year are given below:
The company had an overall return on investment (ROI) of 16.00% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $2,501,500. The cost and revenue characteristics of the new product line per year would be: Sales$ 9,500,000 Variable expenses65% of sales Fixed expenses$ 2,574,100
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