The Empire Hotel is a full-service hotel in a large city. Empire is organized in

Question

The Empire Hotel is a full-service hotel in a large city. Empire is organized into three departments that are treated as investment centers. Budget information for the coming year for these three departments is shown below. The managers of each of the departments are evaluated and bonuses are awarded each year based on ROI.

Compute the ROI for each department. Use the DuPont method to analyze the return on sales and capital turnover. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Assume the Health Club-Spa is considering installing new exercise equipment. Upon investigating, the manager of the division finds that the equipment would cost $50,000 and that sales revenue would increase by $8,000 per year as a result of the new equipment. What is the ROI of the investment in the new exercise equipment? What impact does the investment in the exercise equipment have on the Health Club-Spa's ROI? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Would the manager of the Health Club-Spa be motivated to undertake such an investment?

Compute the residual income for each department if the minimum required return for the Empire Hotel is 17 percent. (Negative amounts should be indicated with a minus sign. Omit the "$" sign in your response.)

What would be the impact of the investment on the Health Club%u2014Spa's residual income? (Enter your answer as a positive number. Omit the "$" sign in your response.)

The Empire Hotel is a full-service hotel in a large city. Empire is organized into three departments that are treated as investment centers. Budget information for the coming year for these three departments is shown below. The managers of each of the departments are evaluated and bonuses are awarded each year based on ROI.

Explanation / Answer

a)ROI=8000/50000=16%

impact=(103000+8000)/(1060300+50000)=10%

b) no

the manager is not motivated since it decreses the department ROI

c-1

residual income of departments
hotel room=1,539,000 -17%*8,156,000 =152480

restuarant=781,000 -17%*4,760,000 =-28200

health club=103,000 -17%*1,060,000 =-77200

c-2

if the health club spa buys the equipment ,itd residual income will decline furtherand becomes more negative = 8000 - (50000*0.17) = -500

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