Question

In: Accounting

Pan Company is made up of three Divisions: Goose, Ice, and Joker. They have been presented with...

Pan Company is made up of three Divisions: Goose, Ice, and Joker. They have been presented with a new investment opportunity to sell highly technical stunt planes. Financial information is given below.

	Maverick Company	Goose Division	Ice Division	Joker Division	New Investment Opportunity
Sales	$9,000,000	$3,500,000	$3,000,000	$2,500,000	$1,500,000
Net Income	$ 3,000,000	$ 1,000,000	$ 1,200,000	$ 800,000	$ 500,000
Assets	12,200,000	$ 4,000,000	$ 2,600,000	4,000,000	$1,600,000



DROI	23%

Calculate the Margin for the Company as a whole, each division, and the investment opportunity.
Calculate the Turnover for the Company as a whole, each division, and the investment opportunity
Calculate the ROI for the Company as a whole, each division, and the investment opportunity Calculate the Residual income for the Company as a whole, each division, and the investment opportunity

	Maverick Company	Goose Division	Ice Division	Joker Division	New Investment Opportunity
Margin
Turnover
ROI
RI

Should the company take this investment based on ROI?
Which division should not take this opportunity based on ROI?
Which division is most likely to take this opportunity based on RI?
As a manager, which division would you offer this opportunity to?

Expert Solution

A)

margin = net income / sales

	Whole company	Goose Division	Ice Division	Joker Division	New Investment Opportunity
	=3000000/9000000	=1000000/3500000	=1200000/3000000	=800000/2500000	=500000/1500000
Margin	33.33%	28.57%	40%	32%	33.33%

B)

turnover = sales

sales are given in the question

C)

ROI = net income / assets

	Whole company	Goose Division	Ice Division	Joker Division	New Investment Opportunity
	=3000000/12200000	=1000000/4000000	=1200000/2600000	=800000/4000000	=500000/1600000
ROI	24.59%	25.00%	46.15%	20.00%	31.25%

residual income = Net income - desired income

where

desried income = 23% x assets

	Whole company	Goose Division	Ice Division	Joker Division	New Investment Opportunity
	=23%*12200000	=23%*4000000	=23%*2600000	=23%*4000000	=23%*1600000
desired income	2806000	920000	598000	920000	368000
Net Income	3000000	1000000	1200000	800000	500000

RI	194000	80000	602000	-120000	132000

A)

since roi of new opportunity is 31.25% which is greater than desired ROI of 23% , company should take this investment

B)

Since Ice divison already has a higher ROI than the new opportunity , it does not need to take it up

C)

Since joker divison has lowest RI of -120000 , it needs the help of the new investment

D)

As a manager , I would offer this investment to joker division since it is performing below par and having this investment can help it achieve positive RI .

Thanks, if you have any doubts please leave a comment and let me know

ekkarill92 answered 2 years ago

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