Question 2 Morristown Industries would like to become more vertically integrated
ID: 2416195 • Letter: Q
Question
Question 2
Morristown Industries would like to become more vertically integrated. They are considering the purchase of one or more of the companies in their supply chain. Which one(s) of the following companies would you recommend as the best choice? Use ROI and residual income calculations to make your decision. Show all work.
____________ Company___________________
_____A_____ _____B_____ ____ C_____
Sales $3,600,000 $6,000,000 $1,500,000
Net Operating Income 240,000 220,000 96,000
Average Operating Assets 1,000,000 2,000,000 800,000
Minimum required rate of return: 10% 8% 12%
Explanation / Answer
1. Co. A ROI is 8%
Net income is 220,000
Operating asset is 2000000
Required income = 2,000,000 *8% = 160,000
% of ROI = 220,000/2,00,000 = 11%
Return on sales = 220,000/6,000,000 = 3.67%
2. Co B ROi = 12%
Net income is 96,000
Operating asset is 800000
Required income = 800,000 * 12% = 96,000
Return on sales = 96000/1,500,000 = 6.4%
3. Co C ROI = 10%
Net income is 240,000
Operating asset is 1000,000
Required income = 1,000,000 * 10% = 100,000
% of ROI = 240,000/1,000,000 = 24%
Return on sales = 240,000/3,600,000 = 6.67%
SHOULD GO FOR CO. C SINCE IT HAS HIGHEST ROI AND % OF SALES OVER INCOME
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