The following data are available for two divisions of Solomons Company. North Division South Division Division operating profit
Question:
Answers
a-1. Calculate the ROI for both North and South divisions.
ROI North Division = net profit / cost of investment = $6,000,000 / $30,000,000 = 20%ROI South Division = net profit / cost of investment = $30,000,000 / $320,000,000 = 9.38%a-2. If Solomons measures performance using ROI, which division had the better performance?
North Division, since its ROI is much higherb-1. Calculate the EVA for both North and South divisions. (The divisions have no current liabilities.)
North Division EVA = (net investment) x (actual return on investment – percentage cost of capital) = $30,000,000 x (20% - 8%) = $3,600,000South Division EVA = (net investment) x (actual return on investment – percentage cost of capital) = $320,000,000 x (9.38% - 8%) = $4,416,000b-2. If Solomons measures performance using economic value added, which division had the better performance?
It should choose South Division because its EVA is higher.c. Would your evaluation change if the company’s cost of capital was 16 percent?
1. When evaluated by ROI?
No it would not change because ROI doesn't consider cost of capital.2. When evaluated by EVA?
Yes it would change because South Division's EVA would be negative, while North Division's will decrease but remain positive.North Division EVA = (net investment) x (actual return on investment – percentage cost of capital) = $30,000,000 x (20% - 16%) = $1,200,000
South Division EVA = (net investment) x (actual return on investment – percentage cost of capital) = $320,000,000 x (9.38% - 16%) = -21,184,000
Solomons Company
North and South Divisions
North/South Divisions:
Operating Profit = $6,000,000/$40,000,000
Investment = $30,000,000/$320,000,000
Cost of Capital (WACC) = 8%
a-1) ROI for both North and South Divisions:
ROI = Return on Investment
= Operating Profit/Investment x 100
North's ROI = 6/30 x 100 = 20%
South's ROI = 40/320 x 100 = 12%
a-2) If Solomons measures performance using ROI, the North division had the better performance.
b-1) Calculation of EVA for both North and South divisions:
EVA = Economic Value Added.
EVA = Net Operating Profit After Taxes minus (Invested Capital x WACC)
North's EVA = $6,000,000 - ($30,000,000 x 8%) =6m - 2.4m = $3,600,000
South's EVA = $40,000,000 - ($320,000,000 x 8%) = 40m - 25.6m = $14,400,000
b-2) If Solomons measures performance using economic value added, the South division had the better performance.
c) 1. When ROI is evaluated using 16% cost of capital, the North division had a better performance. So the evaluation changes based on the 16% cost of capital. Whereas, North makes 20% ROI as against 16% cost of capital, the South manages 12% ROI as against 16% cost of capital.
c) 2. When performances are evaluated by EVA with 16% cost of capital:
North's EVA = $6,000,000 - ($30,000,000 x 16%) = 6m - 4.8m = $1,200,000
South's EVA = $40,000,000 - ($320,000,000 x 16%) = $40m - $51.2m = ($11,200,000)
When evaluated by EVA using 16% cost of capital, my evaluation would favour the North instead of the South.
Explanation:
ROI or Return on Investment is a financial performance measure which measures the profitability of an investment in a simple way. It compares the return on an investment relative to its cost. It is expressed as a percentage.
EVA or Economic Value Added is also a financial performance measure which subtracts the cost of capital from the operating profit in order to gauge in dollars terms the value created by the firm.
1. Condensed income statement for three divisions
cerealsnack,cakebakeries
sales 17600000 180000009520000
Cost of sales 10600000 125500006630000
gross profit 7000000 54500002890000
operating expenses 6120000 47300002318800
net Income 880000 720000571200
invested assets 800000060000006800000
2.profit margin 0.1 0.0 0.1
investment turnover2.2 3 1.4
Return on investment0.1 0.1 0.1
3. Snack and cake division should be the one to expand because it has a high investment turnover meaning for every three sales they utilise one asset and it has a high turnover.
Explanation:
profit margin = net income/sales
investment turnover = sales/ assets
ROI = net income / assets
Answer and Explanation:
Sako Company's Audio Division
a. If Audio Division is currently selling only 49,000 speaker each year to outside customers at the stated $43 price, it means division is having spare capacity of 9000 speaker.
Lowest acceptable transfer price from the perspective of the audio Division = Variable cost per speaker
= $20
b. Highest acceptable transfer price from the perspective of the Hi-fi Division = marker price from outside supplier = $35 per speaker
c. Range of acceptable transfer prices (if any) between the two divisions = $20 to $35
Yes, the managers of the Audio and Hi-fi Divisions likely to voluntarily agree to a transfer price for 9,000 speakers.
d. Yes, from stand point of company also, this transfer should take place.
Solution 2:
a. If Audio Division can sell all of its speaker to outside customers for $43 per speaker, lowest acceptable transfer price from the perspective of the audio Division is selling price i.e. $43 per speaker
b. Highest acceptable transfer price from the perspective of the Hi-fi Division = marker price from outside supplier = $35 per speaker
c. Range of acceptable transfer prices (if any) between the two divisions - Range of acceptable transfer price cannot be established as lowest acceptable transfer price for audio division is higher than highest acceptable transfer price of Hifi division.
Manager of Audio and Hi -fi division is not likely to voluntarily agree to a transfer price for 9,000 speakers.
d. From stand point of the entire company also, this transfer should not take place.
Attached is the prepared table:
[tex]The Whole Life Baked Goods Company is a diversified food company that specializes in all-natural foo[/tex]
Evaluating Divisional Managers on the basis of ROI may not be goal congruent.
Explanation:
While Return On Investment (ROI) is a common denominator for comparing the returns of dissimilar business or divisions, it has its demerits.
A problem exists when this measure is used to evaluate performance of divisional managers. Evaluating Divisional Managers on the basis of ROI may not be goal congruent.
Divisional Managers will accept or not accept projects in their best interest if new projects does not result in greater ROI than the previous,leaving or ignoring the company interest.
Step-by-step explanation:
For finding out g*f(x) we must have both the functions well defined. Otherwise there is no way to find the composition function value.
Since we are to find (g°f)(0
we must have atleast the value of f(0)
Hence option b is correct
Step-by-step explanation:
Not wanting to be trite, i'd still suggest that you use a calculator for routine division. Round off your answer (quotient) to an appropriate number of decimal places.
For example, 2/3 comes out to 0.66666 ... (repeating decimal). You might want to round this off to 2 decimal places: 0.67.
The old fashioned "long division" is another method.
0 . 6
3 / 2 . 0 0 0
0. 0 0 0
1. 8
and so on. You still need to round off the quotient to a suitable number of decimal places.
You technically can’t model (gºf)(0) if a f(x) equation is not given to you. Since you only have a g(x) equation, you cannot find (gºf)(0)