Batman Abstract Company has three divisions that operate autonomously. Their res
ID: 2598149 • Letter: B
Question
Batman Abstract Company has three divisions that operate autonomously. Their results for 2013 are as follows:
Riddler
Joker
Penguin
Sales
$15,000,000
$30,000,000
$8,000,000
Contribution margin
3,440,000
4,700,000
300,000
Operating income
1,500,000
1,750,000
520,000
Investment base
9,000,000
10,000,000
4,000,000
Current Liabilities
$1,000,000
$2,000,000
$500,000
Minimum desired rate of return
12%
12%
12%
Tax Rate
30%
30%
30%
The company's cost of capital is 10%.
Required for each division:
a. Compute profit margin, total assets turnover and division's ROI.
b. Compute each division's residual income. (RI)
c. Compute each division's Economic Value Added (EVA) – assuming 12%
d. Rank each division by both ROI and residual income.
e. Which division had the best performance and Why?
Riddler
Joker
Penguin
Sales
$15,000,000
$30,000,000
$8,000,000
Contribution margin
3,440,000
4,700,000
300,000
Operating income
1,500,000
1,750,000
520,000
Investment base
9,000,000
10,000,000
4,000,000
Current Liabilities
$1,000,000
$2,000,000
$500,000
Minimum desired rate of return
12%
12%
12%
Tax Rate
30%
30%
30%
Explanation / Answer
STEP 1 - Calculation of Profit Margin & Asset Turnover
(a) Profit Margin = Net Income/Sales*100
(b) Asset Turnover ratio
Asset Turnover = sales/Assets
STEP 2 - ROI calculation
ROI = Income/Investment Base * 100
STEP 3 - Residual Income
Residual Income = Investment base*Minimum rate of return
$1080000
($9000000*12%)
$1200000
(10000000*12%)
$480000
($4000000*12%)
Step 4 - Calculation of EVA
EVA = Net Operating profit after Tax - Cost of Capital
$1050000
($15000000-30%)
$1487500
($1750000 - 30%)
$364000
($520000 - 30%)
$900000
($9000000*10%)
$1000000
($10000000*10%)
$400000
($4000000*10%)
Step 5 - Ranking
Step 6 - Division Joker has performed best since it has higher EVA, HIGHER ROI, HIGHER RESIDUAL INCOME
Particulars Riddler Joker Penguin Sales $15000000 $30000000 $8000000 Operating Income $1500000 $1750000 $520000 Profit Margin $10% 5.83% 6.5%Related Questions
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