1. (10 points) Eban Wares is a division of a major corporation. The following da
ID: 2479794 • Letter: 1
Question
1. (10 points) Eban Wares is a division of a major corporation. The following data are for the latest year of operations: Sales $10,000,000 Net operating income $950,000 Average operating assets $4,000,000 The company’s minimum required rate of return 14% The manager of Eban Wares has an opportunity to add a project with the following characteristics: Cost of new equipment $1,200,000 Additional revenues $3,000,000 Additional expenses $2,100,000 Required: a. What is the division's margin (before the new project)? b. What is the division's turnover (before the new project)? c. What is the division's return on investment (ROI) (before the new project)? d. What is the division's residual income (before the new project)? e. What is the division's margin (after the new project is added)? f. What is the division's turnover (after the new project is added)? g. What is the division's return on investment (ROI) (after the new project is added)? h. What is the division's residual income (after the new project is added)?
Explanation / Answer
a. Division's margin (before the new project) = Net operating income/Sales
Division's margin (before the new project) = 950000/10000000
Division's margin (before the new project) = 9.50%
b. Division's turnover (before the new project) = Sales/Average operating assets
Division's turnover (before the new project) = 10,000,000/4,000,000
Division's turnover (before the new project) = 2.50 Times
c. Division's return on investment (ROI) (before the new project) = Net operating income/Average operating assets
Division's return on investment (ROI) (before the new project) = 950,000/4,000,000
Division's return on investment (ROI) (before the new project) = 23.75%
d. Division's residual income (before the new project) = Actual Net operating Income - Normal Income
Division's residual income (before the new project) = 950000 - (14%*4000000)
Division's residual income (before the new project) = $ 390,000
Sales
e. Division's margin (after the new project is added is added) = Net operating income/Sales
Division's margin (after the new project is added is added) = 1850000/13000000
Division's margin (after the new project is added is added) = 14.23%
f. Division's turnover (after the new project is added) = Sales/Average operating assets
Division's turnover (after the new project is added) = 13,000,000/5,200,000
Division's turnover (after the new project is added) = 2.50 Times
g. Division's return on investment (ROI) (after the new project is added) = Net operating income/Average operating assets
Division's return on investment (ROI) (after the new project is added) = 1850,000/5,200,000
Division's return on investment (ROI) (after the new project is added) = 35.58%
h. Division's residual income (after the new project is added) = Actual Net operating Income - Normal Income
Division's residual income (after the new project is added) = 1850000 - (14%*5200000)
Division's residual income (after the new project is added) = $ 1,122,000
after new project added before project added incremental after project additionSales
10,000,000 3,000,000 13,000,000 operating income 950,000 900,000 1,850,000 Average operating asset 4,000,000 1,200,000 5,200,000Related Questions
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