Review Exercises 1. Rochelle Company has just purchased a milling machine at a c
ID: 2424830 • Letter: R
Question
Review Exercises
1. Rochelle Company has just purchased a milling machine at a cost of $200,000. The machine is expected to generate operating income of $18,000 per year during its 10-year useful life. Rochelle uses the straight-line method of depreciation with a zero terminal disposal value.
Calculate ROI in the following situations:
a. First year using gross book value as the investment base.
b. Sixth year using gross book value as the investment base.
c. First year using net book value at the end of the year as the investment base.
d. Sixth year using net book value at the beginning of the year as the investment base.
2. The Kline Corporation manufactures pharmaceutical products in the U.S. and China. The operations are organized as decentralized divisions. The following information is available for 2010:
U.S. Division
China Division
Operating income
$2,400,000
11,400,000 yuan
Total assets
$16,000,000
75,000,000 yuan
The exchange rate at the time of Kline’s investment in China on December 31, 2009 was 7.5 Chinese yuan = $1 U.S. During 2010, the yuan declined steadily in value and the exchange rate on December 31, 2010, was 8.5 yuan = $1. The average exchange rate during 2010 was 8 yuan = $1.
a. Calculate the U.S. Division’s ROI for 2010 based on dollars.
b. Calculate the China Division’s ROI for 2010 based on yuan.
c. Which of Kline’s two division’s earned the better ROI in 2010? Explain your answer, complete with supporting calculations.
3. Endicott Inc. has four divisions. Each division produces and sells a variety of industrial products. The company is developing a compensation plan for the division managers. Three options are being considered: (a) salary, (b) a performance-based incentive using RI, (c) mix of salary and a performance-based incentive using RI. What factors should be considered in designing this plan?
(
Explanation / Answer
ROI = Operating income÷Cost
a)
= $18,000/$200,000
= 9%
b)
= $18,000/$200,000
= 9%
c)
= $18,000/($200,000-$20,000)
= 10%
d)
= $18,000/($200,000-$120,000)
= 22.50%
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