Chapter 9
Take Two Solutions
Exercise 9-1 (10 minutes)
1.
Net operating income
Margin = Sales
$600,000
= = 7.5%
$8,000,000
2.
Sales
Turnover = Average operating assets
$8,000,000
= = 1.6
$5,000,000
3.
ROI = Margin × Turnover
= 7.5% × 1.6 = 12%
Exercise 9-2 (10 minutes)
Average operating assets ………………….
$2,800,000
Net operating income ……………………….
$ 600,000
Minimum required return:
15% × $2,800,000 ………………………..
420,000
Residual income………………………………
$ 180,000
Exercise 9-3 (20 minutes)
Throughput time =
Process time + Inspection time + Move time +
Queue time
=
4.8 days + 0.3 days + 1.0 days + 5.0 days
=
11.1 days
2. Only process time is value-added time; therefore the manufacturing
cycle efficiency (MCE) is:
–Value added time 4.8 days
Throughput time 11.1 days
3. If the MCE is 43%, then 43% of the throughput time was spent in
Delivery cycle time =
Wait time + Throughput time
=
14.0 days + 11.1 days
=
25.1 days
5. If all queue time is eliminated, then the throughput time drops to only
6.1 days (4.8 + 0.3 + 1.0). The MCE becomes:
–Value added time 4.8 days
Exercise 9-6 (20 minutes)
1. ROI computations:
Net operating income Sales
ROI = ×
Sales Average operating assets
$9,000,000 $4,000,000
2.
Osaka
Yokohama
Average operating assets (a) ………………….
$1,000,000
$4,000,000
Net operating income …………………………..
$200,000
$720,000
Minimum required return on average
operating assets: 15% × (a) ……………….
150,000
600,000
Residual income ………………………………….
$ 50,000
$120,000
3. No, the Yokohama Division is simply larger than the Osaka Division and
for this reason one would expect that it would have a greater amount of
Exercise 9-11 (30 minutes)
1.
Net operating income
Margin = Sales
$70,000
= = 5%
$1,400,000
Sales
Turnover = Average operating assets
$1,400,000
= = 7
$200,000
ROI = Margin × Turnover
= 5% × 7 = 35%
2.
Net operating income
Margin = Sales
$70,000 + $18,200
=
$1,400,000 + $70,000
$88,200
= = 6%
$1,470,000
Sales
Turnover = Average operating assets
$1,470,000
= = 7.35
ROI = Margin × Turnover
Exercise 9-11 (continued)
3.
Net operating income
Margin = Sales
$70,000 + $14,000
=
$1,400,000
$84,000
= = 6%
$1,400,000
Sales
Turnover = Average operating assets
$1,400,000
= = 7
$200,000
ROI = Margin × Turnover
= 6% × 7 = 42%
4.
Net operating income
Margin =
Sales
$70,000
= = 5%
$1,400,000
Sales
Turnover = Average operating assets
$1,400,000
= $200,000 – $70,000
ROI = Margin × Turnover
Exercise 9-12 (30 minutes)
1. ROI computations:
Net operating income Sales
ROI = ×
Sales Average operating assets
$25,000,000 $5,000,000
Division A
Division B
Division C
Average operating assets ………
$3,000,000
$7,000,000
$5,000,000
Required rate of return………….
× 17%
× 17%
× 17%
Required operating income …….
$ 510,000
$1,190,000
$ 850,000
Actual operating income ………..
$ 600,000
$ 560,000
$ 800,000
Required operating income
(above) …………………………..
510,000
1,190,000
850,000
Residual income ………………….
$ 90,000
$(630,000)
$ (50,000)
Exercise 9-12 (continued)
3. a. and b.
Division A
Division B
Division C
Return on investment (ROI) ………..
20%
8%
16%
Therefore, if the division is
presented with an investment
opportunity yielding 15%, it
probably would ………………………
Reject
Accept
Reject
Minimum required return for
computing residual income ……….
17%
17%
17%
Therefore, if the division is
presented with an investment
opportunity yielding 15%, it
probably would ………………………
Reject
Reject
Reject
If performance is being measured by ROI, both Division A and Division C
probably would reject the 15% investment opportunity. These divisions’
ROIs currently exceed 15%; accepting a new investment with a 15%
rate of return would reduce their overall ROIs. Division B probably would
accept the 15% investment opportunity because accepting it would
increase the division’s overall rate of return.
If performance is measured by residual income, Divisions A, B, and C
probably would reject the 15% investment opportunity. The 15% rate of
return promised by the new investment is less than their required rate
of return of 17%.
Exercise 9-13 (15 minutes)
1.
Net operating income
Margin = Sales
$300,000
= = 10%
$3,000,000
Sales
Turnover = Average operating assets
$3,000,000
= = 4
$750,000
ROI = Margin × Turnover
= 10% × 4 = 40%
2.
Net operating income
Margin = Sales
$300,000(1.00 + 2.00)
=
$3,000,000(1.00 + 0.50)
$900,000
= = 20%
$4,500,000
Sales
Turnover = Average operating assets
Exercise 9-13 (continued)
3.
Net operating income
Margin = Sales
$300,000 + $200,000
=
$3,000,000 + $1,000,000
$500,000
= = 12.5%
$4,000,000
Sales
Turnover = Average operating assets
$3,000,000 + $1,000,000
= $750,000 + $250,000
$4,000,
= 000 = 4
$1,000,000
ROI = Margin × Turnover
= 12.5% × 4 = 50%