The following information applies to the questions displayed below.] Kenneth Was
ID: 2581984 • Letter: T
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The following information applies to the questions displayed below.] Kenneth Washburn, head of the Sporting Goods Division of Reliable Products, has just completed a miserable nine months. "If it could have gone wrong, it did. Sales are down, income is down, inventories are bloated, and quite frankly, I'm beginning to worry about my job," he moaned. Washburn is evaluated on the basis of ROl. Selected figures for the past nine months follow Sales Operating income Invested capital $ 8,900,000 534,000 11,125, 000 In an effort to make something out of nothing and to salvage the current year's performance Washburn was contemplating implementation of some or all of the following four strategies a. Write off and discard $107,000 of obsolete inventory. The company will take a loss on the disposal b. Accelerate the collection of $137,000 of overdue customer accounts receivable c. Stop advertising through year-end and drastically reduce outlays for repairs and maintenance. These actions are expected to save the division $242,000 of expenses and will conserve cash resources. d. Acquire two competitors that are expected to have the following financial characteristics Projected Sales $4,840,000 7,090,000 Projected Operating Expenses $3,770,000 6,520,000 Projected Invested Capital $10,700,000 9,500,000 Anderson Manufacturing Palm Beach EnterprisesExplanation / Answer
4A) Return On Investment (ROI) = Operating Income ÷ Projected Invested Capital
Anderson Manufacturing
operating income =sales - expected operating costs
=4840000-3770000=1070000
Invested Capital =10700000
ROI =1070000÷10700000=.10 OR 10%
Palm Beach Enterprise
operating income = sales - operating expenses
=7090000-6520000=570000
invested capital =9500000
ROI =570000÷9500000=.06 OR 6%
4B) IF THEY NEED TO MAXIMIZE ROI THEY SHOULD INVEST IN ANDERSON MANUFACTURING.WHICH GIVE THEM 10% RETURN ON INVESTMENT.PALM BEACH ENTERPRISES GIVES ONLY 6% ROI.
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