Feng, Inc. is a manufacturer of tires and rubber. Below is some information on t

Question

Feng, Inc. is a manufacturer of tires and rubber. Below is some information on the 2016 financials of the tires division and the rubber division:
Tires Rubber

Revenue $4,873,700 $3,753,200

Direct Material Costs $1,173,700 $1,056,513

Direct Labor Costs $1,000,000 $726,587

In addition to the above costs, indirect costs, which comprise of corporate overhead, amount to $3,182,100. Corporate overhead is allocated to each division based on direct labor costs. Assume that the average investment in the tires division is $8,594,000 and in the rubber division is $7,674,000. Feng’s cost of capital is 14%. Assume tax rate is zero. Required: (1) Compute ROI for each division. (2) Compute RI for each division.

Explanation / Answer

(1)

(2)

ROI = Net Profit / Total Investment * 100       Tires Rubber Revenue       $4,873,700 $3,753,200 Direct Material Costs    $1,173,700 $1,056,513 Direct Labor Costs    $1,000,000 $726,587 Corporate overhead $1,843,000 $1,339,100 Net Profit $857,000 $631,000 Average investment $8,594,000 $7,674,000 ROI 9.97% 8.22%

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