Question

In: Accounting

The company provides some details for the period 2020 for preparing necessary budgets: (a) Sales Details...

The company provides some details for the period 2020 for preparing necessary budgets:

(a) Sales Details

The Company estimates that it can get maximum profits if it charges $ 200 (selling price) for one of its products. The marketing manager of the company had indicated that at $ 200 selling price, the company would be able to sell 1,000 units in the first quarter of 2020. The company also expects that sales would go up by 100 units over previous quarter sales (like 1000, 1100 and so on….) Selling price is expected to be same throughout the year.

(b) Inventory details

Alwyn Industries maintains at the end of each quarter an inventory of 10% of the next quarter’s sales. This allows the company to better meet its customers’ needs in case the customers experience a sudden surge in demand. The opening inventory for first quarter 2020 has been estimated to be 200 units

(c) Divisional Performance

Alwyn Industries has to divisions (A & B) working within the company. The CEO of the company is wondering whether divisional performance evaluation will be fruitful for them since the company has two divisions operating with certain targets. The head of those divisions report the following results for the quarter ending 2019, which is given below:

Particulars

Division A

Division B

Operating Income

900,000

1,951,600

Average Total Assets

2,500,000

6,500,000

Net Sales

7,500,000

5,243,600

Question : Evaluate the divisional performance (A & B) using ROI for the quarter ending 2019 stating which product is better and why

Solutions

Expert Solution

(a) Sales Budget
First Quarter Second Quarter Third Quarter Fourth Quarter Total
Sales in Units             1,000                    1,100               1,200                  1,300        4,600
x Selling price per unit                 200                       200                   200                      200           200
Budgeted Sales $       200,000              220,000         240,000            260,000 920,000
(b) Inventory Budget
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales in Units             1,000                    1,100               1,200                  1,300
Add: Desired Ending Inventory @10% of next quarter sales                 110                       120                   130                      140
Total Needed             1,110                    1,220               1,330                  1,440
Less: Opening Inventory 200                       110                   120                      130
Budgeted Purchases in Units                 910                    1,110               1,210                  1,310
Working:-
Sales of First quarter of 2021             1,400 ( 1,300 + 100 )
Fouth quarter ending Inventory 140 ( 1,400 x 10% )
(c ) Division A Division B
Operating Income        900,000            1,951,600
/ Average total Assets      2,500,000            6,500,000
ROI 36.0% 30.0%
Division A is better because its ROI of 36% is more than Division B ROI of 30%.

ekkarill92 answered 2 years ago
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