Question
Blackwood Industries manufactures die machinery. To meet its needs, it recently (2016) acquired one of its suppliers, Delta steel. To maintain Deltas separate identity, Blackwood
Blackwood Industries manufactures die machinery. To meet its needs, it recently (2016) acquired one of its suppliers, Delta steel. To maintain Deltas separate identity, Blackwood reports Deltas operations as an investment centre. Blackwood monitors all of its investment centres based on return on investment (ROI). Management bonuses are based on ROI, and all investment centres are expected to earn a minimum of 10% return before income taxes. Delta divisions operating assets were $16,000,000 at the end of 2018, a 6% increase over the 2017 year-end balance. The 2018 operating statement for Delta follows.
The company has an opportunity for new investment. The following data relate to the new investment:
a) Calculate the current return on investment (ROI) and residual income (RI) of the Delta division. Show your all calculations.
b) Calculate the ROI for the Delta division with the new investment and explain the likely reaction of the divisional manager towards the new investment, if the divisions are evaluated based on ROI. Show all computations to support your answer.
c) Calculate residual income (RI) for the Delta division with the new investment and explain the likely reaction of the divisional manager towards the expansion, if the divisions are evaluated based on RI. Show all computations to support your answer.
d) Explain the likely reaction of Blackwood Industries corporate management to the new investment. Show all computations to support your answer.
Delta Division Operating statement for the year ended December 31, 2018 Sales Cost of goods sold Gross profit Operating expenses: Administration $2,808 Selling $4332 Operating profit (000s) $29,500 (19,920) 9,580 7140 - 2808 7,140 $2,440 Sales Cost of goods sold Operating expenses Invested capital (000s) $ 5000 2400 1600 8000
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