Question

The Global Products Corporation has three subsidiaries.

	Medical Supplies		Heavy Machinery		Electronics
Sales	$	20,820,000	$	5,720,000	$	4,890,000
Net income (after taxes)		1,890,000		597,000		344,000
Assets		8,370,000		8,380,000		3,140,000

     
a-1. What is the return on sales for each subsidiary? (Input your answers as a percent rounded to 2 decimal places.)
  

a-2. Which subsidiary has the lowest return on sales?
  

• Medical Supplies

• Electronics

• Heavy Machinery

   
b-1. What is the return on assets for each subsidiary? (Input your answers as a percent rounded to 2 decimal places.)
  

b-2. Which subsidiary has the highest return on assets?
  

• Medical Supplies

• Heavy Machinery

• Electronics

   
c. Compute the return on assets for the entire corporation. (Input your answer as a percent rounded to 2 decimal places.)
  

d. If the $8,380,000 investment in the heavy machinery division is sold off and redeployed in the medical supplies subsidiary at the same rate of return on assets currently achieved in the medical supplies division, what will be the new return on assets for the entire corporation? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Answer 1

a-1.

Return on sales of each subsidiary

Return on sales = [Net income (after tax) / sales]*100

Subsidiary	Calculation	Return on sales
Medical Supplies	[1,890,000/ 20,820,000]*100= 0.09078*100	9.08%
Electronics	[597,000/ 5,720,000]*100 = 0.1044*100	10.44%
Heavy Machinery	[344,000/ 4,890,000]*100 = 0.0704*100	7.04%

a-2.

From the calculations done in part a-1 we can see that Heavy Machinery has lowest return on sales

b-1.

Return on assets of each subsidiary

Return on assets = [Net income (after tax) / Assets]*100

Subsidiary	Calculation	Return on sales
Medical Supplies	[1,890,000/ 8,370,000]*100= 0.2258*100	22.58%
Electronics	[597,000/ 8,380,000]*100 = 0.0712*100	7.12%
Heavy Machinery	[344,000/ 3,140,000]*100 = 0.1096*100	10.96%

b-2.

From the calculations done in part b-1 we can see that Medical Supplies has highest return on assets

c.

Return on assets of entire corporation = [Total net income(after tax) of entire corporation / Total Assets]*100

Total net income(after tax) of entire corporation = 1,890,000 + 597,000 + 344,000 = 2,831,000

Total Assets = 8,370,000 + 8,380,000 + 3,140,000 = 19,890,000

Return on assets of entire corporation = [2,831,000/ 19,890,000]*100 = 0.1423 * 100 = 14.23%

d.

If the $8,380,000 investment in the heavy machinery division is sold off and redeployed in the medical supplies subsidiary

The additional net income in Medical Supplies = [1,890,000/ 8,370,000]* 8,380,000 = $1,892,258

Total net income(after tax) of entire corporation = 1,890,000 + 597,000 + 1,892,258 = 4,379,258

Total investments in assets will remain the same.

Return on assets of entire corporation = [4,379,258/ 19,890,000]*100 = 0.2202 * 100 = 22.02%