Computing and Interpreting Return on investment

Selected operating data for two divisions of Outlook Brewing, Ltd., of Australia are given below:

Division

Queensland New South Wales

Sales: $4,000,000 $7,000,000

Average Operating Assets: $2,000,000 $2,000,000

Net Operating Income: $360,000 $420,000

Property, Plant, and equipment (net) $950,000 $800,000

1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover
2. Which divisional manager seems to be doing the better job? Why?

Exercise 12- 1 Identifying Relevant Costs:

A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:

Case 1

Item Relevant Not Relevant

a. Sales Revenue

b, Direct Materials

c. Direct Labor

d. Variable Manufacturing overhead

e. Depreciation- Model B100 machine

f. Book Value- Model B100 machine

g. Disposal Value- Model B100 machine

h. Market Value- Model B300 machine (cost)

i. Fixed manufacturing overhead (general)

j. Variable selling expense

k. Fixed Selling Expense

l. General administrative overhead

Case 2

Item Relevant Not Relevant

a. Sales Revenue

b, Direct Materials

c. Direct Labor

d. Variable Manufacturing overhead

e. Depreciation- Model B100 machine

f. Book Value- Model B100 machine

g. Disposal Value- Model B100 machine

h. Market Value- Model B300 machine (cost)

i. Fixed manufacturing overhead (general)

j. Variable selling expense

k. Fixed Selling Expense

l. General administrative overhead

Copy the information above onto the sheet and place an X in the appropriate column to indicate weather each item is relevant or not relevant in the following situations. Requirement 1 relates to case 1 above, and requirement 2 to Case 2

1. The company chronically has no idle capcityand the old Model B100 machine in the company's constraint. Management is considering purchasing a Model300 machine to use in addition to the company's present Model B100. The old model B100 machine will continue to be used to capacity as before with the new Model B300 machine being used to expand production. This will increase the company's production and sales. The increase is administrative overhead, but not in the fixed manufacturing overhead.
2. The old model B100 machine is not the company's constraint, but management is considering replacing it with the new model B300 machine because of the potential savings in direct materials with the new machine. The model B100 machine would be sold. The change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.