Manyops, Inc., is a manufacturing firm that has experienced strong competition i

Question

Manyops, Inc., is a manufacturing firm that has experienced strong competition in its traditional business. Management is considering joining the trend to the "service economy" by eliminating its manufacturing operations and concentrating on providing specialized maintenance services to other manufacturers. Management of Manyops, Inc., has had a target ROI of 17% on an asset base that has averaged $7 million. To achieve this ROI, average total asset turnover of 2 was required. If the company shifts its operations from manufacturing to providing maintenance services, it is estimated that average total assets will decrease to $3 million.

Required:

a. Calculate net income, margin, and sales required for Manyops, Inc., to achieve its target ROI as a manufacturing firm. (Enter your "Sales" and "Net income" answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations. Round your answers to 2 decimal places.)

b.Assume that the average margin of maintenance service firms is 2.5%, and that the average ROI for such firms is also 17%. Calculate the net income, sales, and total asset turnover that Manyops, Inc., will have if the change to services is made and the firm is able to earn an average margin and achieve an 17% ROI. (Enter your "Sales" and "Net income" answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations. Round your answers to 2 decimal places.))

Explanation / Answer

Required a)

Net income = $1.19 million

Margin = 8.5%

Sales = $14 million

Calculation:-

ROI = Margin × Turnover

17% = margin × 2

Margin = 8.5%

Margin required as manufacturer = 8.5%

Turnover = sales / Average total aasets

2 = sales /$7 million

Sales = $14 million

Sales required as a manufacturer = $14 million

Margin = net income / sales

8.5% = net income /$14 million

Net income = $1.19 million

Net income required as a Manufacturer = $1.19 million

Requirement b)

ROI = Net income / Average total aasets

17% = Net income / $3 million

Net income = $0.51 million

Net income required as as service firm = $0.51 million

ROI = Margin x Turnover

17% = 2.5% × Turnover

Turnover = 6.8

Turnover required as a service firm = 6.8

Turnover = sales/ average total aasets

6.8 = sales / $3 million

Sales = $20.4 million

Sales required as a service firm = $20.4 million

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