Assets assigned to California Division for 2017 were as follows: Assets Beg Balance End Balance Cash...

Assets assigned to California Division for 2017 were as follows:

Assets Beg Balance End Balance

Cash $250,000 $260,000

Accounts receivable 120,000 135,000

Inventory 230,000 205,000

Plant and equipment (net) 420,000 380,000

Land (undeveloped)* 430,000 430,000

Total assets $1,450,000 $1,410,000

*The undeveloped land is purchased by the President of company in California for construction of future headquarter of the company, that is, Lisa is not accountable for it.

Income Statement

Sales $1,750,000

Cost of goods sold 1,170,000

Operating expenses 300,000

Operating income 280,000

Less interest and taxes:

Interest expense $96,000

Tax expense 70,000 166,000

Net income $114,000

1) Assess and report the performance of Lisa for the year 2018 by computing appropriate measures of

2) Explain the difference between ROI and Profit Margin Ratio by computing Profit Margin Ratio and ROInfor California division. What is each ratio measuring?

Solutions

Expert Solution

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1. Assess and report the performance of Lisa for the year 2018

	Performance Measure: ROI and RI (Residual Income)

	ROI	Return/Investment	114000/380000	30%
		(Land not to be considered as this is not only for california)

	RI	Operating Income-(Operating Assets)*Cost of Capital)
		(since cost of capital not given, lets assume it 25%)
		280000-(380000*25%)
		185000

		Since RI is positive and ROI is more than minimum return, performance is positive

2.the difference between ROI and Profit Margin Ratio


	ROI	Return/Investment	114000/380000	30%	ROI is a performance measure, used to evaluate the efficiency of an investment
		(Land not to be considered as this is not only for california)

	Profit Margin Ratio	Net Income/Sale	114000/1750000	6.5%	indicates how much net income a company makes with total sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual profit.

ekkarill92 answered 1 year ago

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