Use the following to answer Questions 8-11 Chocolate Enterprise is a multi-divis

Question

Use the following to answer Questions 8-11 Chocolate Enterprise is a multi-division company. At present, the overall company's Returm on Investment (ROI) for Chocolate Enterprise as a whole is 1 1%. Chocolate Enterprise has a minimum required rate of return of 10% on all investments. The most successful division with Chocolate Enterprise is the Boxed Candy division. Currently, the Boxed Candy Division has total assets of $2,000,000 with operating income of $400,000. The manager Division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and this investment will increase Candy divisions are awarded to managers with increasing ROls. of the Boxed Candy Division's operating income by $104,000. Bonuses in all the Chocolate Enterprise 8. The ROI for the Boxed Candy Division, after the purchase of Truffles Inc. would A. 11.00% B. 13.00% C. 18.00% D. 20.00% E. 25.00% The Residual Income for the Boxed Candy Division, after the purchase of Truffles Inc. is A. $224,000 B. $260,000 C. $330,000 D. $504,000 E. $550,000 9. 10. If Boxed Candy Division purchases Truffles Inc., what will the impact be on the ROI of Boxed Candy Division? A. ROI will go up B. ROI will stay the same C. ROI will be negative D. ROI will go down E. Cannot be determined from the information given 11. Given the current bonus structure with Chocolate Enterprise, you would expect that Boxed Candy Division to: A. Purchase Truffles Inc. with the current bonus structure because Boxed Candy Division's ROI will increase. B. Not purchase Truffles Inc. with the current bonus structure because Boxed Candy Division's ROI will reduce C. N D. Purchase Truffles Inc. if bonuses are based upon decreasing Residual Income E. Some other answer ot purchase Truffles Inc. if bonuses are based upon increasing Residual Income

Explanation / Answer

8. Return on Investment (ROI) is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI measures the amount of return on an investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

The return on investment formula:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment (Investment base)

ROI for Boxed Candy Division after purchase of truffles Inc. = ($ 400000+$104000) / ($ 2000000 +$800000) = 18%

Ans - C

9.Residual income is the amount of income that an individual has after all personal debts and expenses, including a mortgage, have been paid.

Residual Income for Boxed Candy Division = $ 400000+$104000 = $ 504000 . Ans - D

10.Boxed Candy Division ROI before purchase of truffle = $400000/$ 2000000 = 20%

Therefore , ROI will go down by 2 % after purchase of truffles.Ans - D.

11. As bonus is awarded to Division managers based on Divisions ROI , Ans - B.

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