ANALYZE, THINK, COMMUNICATE ATC 9-1 Business Applications Case Analyzing segment

Question

ANALYZE, THINK, COMMUNICATE ATC 9-1 Business Applications Case Analyzing segments at Coca-Cola The following excerpt is from Coca-Cola Company's 2014 annual report filed with the SEC: Management evaluates the performance of our operating segments separately to individually monitor the different factors affecting financial performance. Our Company manages income taxes and certain treasury related items, such as interest income and expense, on a global basis within the Corporate operating segment. We evaluate segment performance based on income or loss before income taxes. Below are selected segment data for Coca-Cola Company for the 2014 and 2013 fiscal years. Dollar amounts are in millions. Eurasia& North Latin Africa Europe America America Pacific 2014 Fiscal Year Net operating revenues Income before taxes Identifiable operating assets 1,298 3,358 2.426 33,066 1,793 2013 Fiscal Year Net operating revenues Income before taxes Identifiable operating assets 1.273 3,731 2,918 33,964 1,922 $2,730 $5,536 $4,657 $21,479 $5,746 1,084 2,852 2,316 2,447 2,448 $2,763 $5,334$4,939 $21,590 $5,869 2,432 2,478 ,087 2,859 2,908 Required a. Compute the ROI for each of Coke's geographical segments for each fiscal year. Which segment appears to have the best performance during 2014 based their ROIs? Which segment showed the most improvement from 2013 to 2014 Assuming Coke's management expects a minimum return of 30 percent, calculate the residual income for each segment for each fiscal year. Which segment appears to have the best perfor- mance based on residual income? Which segment showed the most improvement from 2013 to 2014? b.

Explanation / Answer

a. Calculation of ROI

2013 Fiscal Year

Eurasia and Africa = $1,087 / $1,273 = 85.39%

Europe = $2,859 / $3,731 = 76.63%

Latin America = $2,908 / $2,918 = 99.66%

North America = $2,432 / $33,964 = 7.16%

Pacific = $2,478 / $1,922 = 128.93%

2014 Fiscal Year

Eurasia and Africa = $1,084 / $1,298 = 83.51%

Europe = $2,852 / $3,358 = 84.93%

Latin America = $2,316 / $2,426 = 95.47%

North America = $2,447 / $33,066 = 7.40%

Pacific = $2,448 / $1,793 = 136.53%

Improvement

Eurasia and Africa = 83.51% - 85.39% = -1.88%

Europe = 84.93% - 76.63% = 8.3%

Latin America = 95.47% - 99.66% = -4.19%

North America = 7.40% - 7.16% = 0.24%

Pacific = 136.53% - 128.93% = 7.6%

Europe has shown best improvement

b. Calculation of Residual Income

Pacific has shown improvement

c. ROI only depends upon the income corporation earned and the operating assets used to generate the ROI however Residual Income also deals with the minimum rate of return required from the operating assets invested. And this is the main reason why highest ROI division is different from highest Residual Income.

d. Company must expand in the Europe segment because its ROI is increasing very good and also its residual income is positively increasing with increased operating assets.

Eurasia & Africa Europe Latin America North America Pacific 2014 a Identifiable Operating assets $1,298 $3,358 $2,426 $33,066 $1,793 b Income before taxes $1,084 $2,852 $2,316 $2,447 $2,448 c Desired rate of return 30% 30% 30% 30% 30% d Residual Income b - (a x c) $694.60 $1,844.60 $1,588.20 ($7,472.80) $1,910.10 2013 e Identifiable Operating assets $1,273 $3,731 $2,918 $33,964 $5,869 f Income before taxes $1,087 $2,859 $2,908 $2,432 $2,478 g Desired rate of return 30% 30% 30% 30% 30% h Residual Income f - (e x g) $705.10 $1,739.70 $2,032.60 ($7,757.20) $717.30 i Improvement ($10.50) $104.90 ($444.40) $284.40 $1,192.80

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