Question

Trees Unlimited has one greenhouse located in each of Corner Brook, Grand Falls, and Conception Bay South. Operating results of the past year for each location are in the following table:

	Corner Brook	Grand Falls	Conception Bay South
Sales	$300,000	$400,000	$450,000
Net Income	60,000	64,000	45,000
Beginning operating assets	200,000	100,000	80,000
Ending operating assets	300,000	300,000	100,000

Required

a. Compute the margin, turnover and rate of return for each location.

b. Trees Unlimited required rate of return is 30%. Compute the residual income for each

      location.

c.   Trees Unlimited would like to expand the market coverage in each community by opening

retail store. The opportunity will require an investment in operating assets of $500,000. It is expected sales will be $350,000 operating expenses of $180,000.   Based on residual income which community would be interest in retail store opportunity? Which would be interested if evaluated based on return on investment?

Answer 1

a) The net profit margin = (Net Income / sales)*100

• For Corner Brook : (60,000 / 300000)*100 = 20 %
• For Grand Falls : (64,000/400,000)*100 = 16%
• For Conception Bay South: (45,000/450,000)*100 = 10%

Turnover/ Asset Turnover Ratio = 2* (Total Sales) / (Beginning Assets + Ending Assets)

• For Corner Brook : 2*300,000/500,000 = 1.2
• For Grand Falls : 2*400,000/400,000 = 2
• For Conception Bay South: 2*450,000/180,000 = 5

Rate Of Return on Assets = Net Income / Avg Total Assets

WHERE Avg Total Assets = (Beginning Assets + Ending Assets) /2

• ROI for Corner Brook : 60,000/250,000 = 0.24 or 24%
• ROI for Grand Falls : 64,000/200,000 = 0.32 or 32%
• ROI for Conception Bay South : 45,000/90,000 = 0.5 or 50%

b) Residual Income = ROR * Avg Total Assets

Given 30% ROR

• Residual Income for Corner Brook: 0.30*250,000 = 75,000
• Residual Income for Grand Falls: 0.30*200,000 = 60,000
• Residual Income for Conception Bay South: 0.30*90,000 = 27,000