Question

. Performance Evaluation Methods

Ebel Wares is a division of a major corporation. The following data are for the latest year of operations:    

	Sales................................................................................	$29,120,000
	Net operating income.....................................................	$1,514,240
	Average operating assets................................................	$8,000,000
	The company’s minimum required rate of return..........	18%

            Required:        

a.       What is the division's margin?

b.      What is the division's turnover?

c.       What is the division's return on investment (ROI)?

d.      What is the division's residual income?

C. Performance Evaluation Methods

The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%

            Required:

a.       Calculate the company's return on investment (ROI) and residual income (RI).

b.      Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?

c.       Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?

d.      Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?

NO IMAGE PLEASE

Answer 1

Ebel Wares
Answer a	Amount $	Note
Net operating income	1,514,240.00	A
Sales	29,120,000.00	B
Division's Margin	5.20%	C=A/B
Answer b	Amount $
Sales	29,120,000.00	See C
Average operating assets	8,000,000.00	D
Division's Turnover	3.64	E=C/D
Answer c	Amount $
Net operating income	1,514,240.00	See A
Average operating assets	8,000,000.00	See D
ROI	18.93%	F=A/D
Answer d	Amount $
Average operating assets	8,000,000.00	See D
Required rate of return	18%	G
Required return	1,440,000.00	H=G*D
Net operating income	1,514,240.00	See A
Residual income	74,240.00	I=A-H
The Clipper Corporation
Answer a	Amount $
Net operating income	380,000.00	J
Average operating assets	2,000,000.00	K
ROI	19.00%	L=J/K
Average operating assets	2,000,000.00	See K
Required rate of return	18%	M
Required return	360,000.00	N=M*K
Net operating income	380,000.00	See J
Residual income	20,000.00	O=J-N
Answer b
Net operating income	12,950.00	P
Average operating assets	70,000.00	Q
ROI	18.50%	R=P/Q

ROI from new investment is greater than the current ROI so it is best interest to make this investment.

Answer c

ROI from new investment is 18.50 which is less than the required ROI of 20% so the division manager will not be inclined to request funds to make this investment.

Answer d
Average operating assets	70,000.00	See Q
Required rate of return	18%	S
Required return	12,600.00	T=Q*S
Net operating income	12,950.00	See P
Residual income	350.00	U=P-T

Residual income from new investment is $ 350 which will increase the current Residual income so yes the division manager will be inclined to request funds to make this investment.