Question

Mary’s Auto Shop Inc. allows its divisions to operate as autonomous units. Their results for the current year were as follows:

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Sport

Terrain

City

Revenues

$2,300,000

$996,000

$6,650,000

Current assets

291,000

91,000

621,000

Capital assets

870,000

660,000

1,590,000

Current liabilities

100,000

100,000

500,000

Net operating income

230,000

40,000

600,000

After-tax income

184,000

32,000

480,000

Weighted average cost of capital

10%

10%

10%

Required:

For each division compute (to two decimal) the:

11. Return on sales in %

12. Return on investment (to two decimal) based on total assets employed in %

13. Economic value added

14. Residual income based on net operating income

Answer 1

we will use following formulas

return on sales = net operating income/ net sales *100

Return on investment (to two decimal) based on total assets employed in % =Net operating income/ Total assets*100

economic value added= After tax income-[WACC*(Total assets-current liabilities)]

Residual income = operating income-(Required rate of return*Total assets)

	Sport	Terrain	City
Revenues (A)	$2,300,000	$996,000	$6,650,000
Current assets	$291,000	$91,000	$621,000
Capital assets	$870,000	$660,000	$1,590,000
Total assets (B)	$1,161,000	$751,000	$2,211,000
Current liabilities (E)	$100,000	$100,000	$500,000
Net operating income (c)	$230,000	$40,000	$600,000
After-tax income (d)	$184,000	$32,000	$480,000
Weighted average cost of capital	10%	10%	10%
(1) Return on sales (C)/(A) * 100	10%[$230,000/$2,300,000]*100	40%[$400,000/$996,000]*100	9%[$600,000/$6,650,000]
(2) Return on investment (to two decimal) based on total assets employed in %	19.81%[$230,000/$1,161,000]*100	53.26%[$400,000/$751,000]*100	27.13%[$600,000/$2,211,000]*100
EVA [d- (b-e)*10%]	$77,900[$184,000-($1,161,000-$100,000)10%]	-$33,100[$32,000-($751,000-100,000)*10%]	$308,900[$480,000-($2,211,000-$500,000)*10%]
Residual Income [C - (B*10%)	$113,900[$230,000-$1,161,000*10%]	$-35,100[$40,000 - ($751,000*10%)]	$378,900[$600,000-($2,211,000*10%)]

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