am 23. (12 points) Selected 2017 financial data for the Kitchen Products divisio

Question

am 23. (12 points) Selected 2017 financial data for the Kitchen Products division of follows: Amalgamated Housewares Corp. is as Total sales revenue $1,222,000 Net operating income Operating assets, 1/1/17 460,000 480,000 25% Operating assets, 12/31/17 Minimum required rate of return Required: a. Compute the division's margin. What does the margin tell us about the division? (1 sentence) b. Compute the division's turnover. What does the turnover tell us about the division? (2 sentence) c. Compute the division's return on investment (ROI). d. Compute the division's residual income. e. The Kitchen Products division posted an ROI of 27% in 2016 if you are the vice president of Kitchen Products, are you pleased with your 2017 results? Why or why not? (2-3 sentences) 12 2 loo 1,22 2,0002.6 4to,ooc c) ROT = margin x turnover d)

Explanation / Answer

Req a: Division margin: Net income/ Sales *100 122200/1222000*100 = 10% Req b: Turnover: Sales/ Average assets Average assets (460000+480000)/2 = 470000 Assets turnover= 1222000/470000 = 2.6 times Req c: ROI: Net income/ Average assets *100 122200 / 470000 *100 = 26% req d: Residual Income: Actual net income 122200 Less: target return (470000*25%) 117500 Residual Income: 4700 Req e: As the income earned last year at a rate of 27% ROI and in current year it is 26%. As the ROI is dropped it is the concern for the management. It may be due to increase in operating assets. However, the division is earning above the minimum cut off ROI of 25% and is earning residual income. So, it will be a satisfactory at the end.

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