Dale Decor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows:

Just answer Part f. Thanks!

Part f. What do you notice when comparing each division's combined residual income in part e. to their current residual income (prior to purchasing the CRM system) in part c.? By how much did they each increase?

1 Dale Dcor Dale Dcor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows: Retail Stores Internet Catalog Sales Sales Revenue $10,000,000 $4,000,000 $3,200,000 Variable Expenses $4,000,000 $1,500,000 $1,800,000 Direct Fixed expenses $4,500,000 $1,000,000 $1,200,000 Net Operating Income (NOI) $1,500,000 $1,500,000 $200,000 Average Operating Assets (AOA) $8,000,000 $4,000,000 $2,000,000 Required return 12% 12% 12% a. Calculate the margin, asset turnover, and ROI for each of the three distribution channels. Profit Margin = Net Operating Income/Sales Revenue 15.00% 37.50% 6.25% Asset Turnover = Sales Revenue/AOA 1.25 1.6 ROI = Profit Margin * Asset Turnover 18.75% 37.50% 10.00% b. The corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $800,000 and is expected to generate $160,000 in additional annual segment margin. If distribution channel managers are evaluated based on the trend of their ROls, which managers will invest in the system? Explain. Addition Annual Segment Margin (Profit) $160,000 System Cost $800,000 ROI after system = (NOI + 160,000)/(AOA + 800,000) 18.86% 34.58% 12.86% Explaination: Both Retail Stores and Catalog Sales will invest since ROI will increase. Internet will reject. C. Calculate the current residual income for each distribution channel. Residual Income (RI) = NOI - AOA* Required return $540,000 $1,020,000 ($40,000) d. Calculate the residual income of the customer relationship management system. Required Operating Income (Req. Ol) = System Cost * Required return $96,000 $96,000 $96,000 RI of customer relationship management system = Profit - Req. Ol $64,000 $64,000 $64,000 e. Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system. RI after purchase = (NOI + 160,000)-(AOA +800,000)*Req. Return $604,000 $1,084,000 $24,000 f. What do you notice when comparing each division's combined residual income in part e. to their current residual income (prior to purchasing the CRM system) in part c.? By how much did they each increase? Increased by The residual income of each segement will increase when accepting the project. 8. If distribution channel managers are evaluated based on residual income, which managers will invest in the system? Explain. Explaination: All of them would invest because the residual income for each segment will increase. h. Why is the residual income for each distribution channel higher in part (b) than in part (a)? Explaination: Because % return from new system 160,000/800,000 = 20% is higher than the required return of 12%. 1 Dale Dcor Dale Dcor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows: Retail Stores Internet Catalog Sales Sales Revenue $10,000,000 $4,000,000 $3,200,000 Variable Expenses $4,000,000 $1,500,000 $1,800,000 Direct Fixed expenses $4,500,000 $1,000,000 $1,200,000 Net Operating Income (NOI) $1,500,000 $1,500,000 $200,000 Average Operating Assets (AOA) $8,000,000 $4,000,000 $2,000,000 Required return 12% 12% 12% a. Calculate the margin, asset turnover, and ROI for each of the three distribution channels. Profit Margin = Net Operating Income/Sales Revenue 15.00% 37.50% 6.25% Asset Turnover = Sales Revenue/AOA 1.25 1.6 ROI = Profit Margin * Asset Turnover 18.75% 37.50% 10.00% b. The corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $800,000 and is expected to generate $160,000 in additional annual segment margin. If distribution channel managers are evaluated based on the trend of their ROls, which managers will invest in the system? Explain. Addition Annual Segment Margin (Profit) $160,000 System Cost $800,000 ROI after system = (NOI + 160,000)/(AOA + 800,000) 18.86% 34.58% 12.86% Explaination: Both Retail Stores and Catalog Sales will invest since ROI will increase. Internet will reject. C. Calculate the current residual income for each distribution channel. Residual Income (RI) = NOI - AOA* Required return $540,000 $1,020,000 ($40,000) d. Calculate the residual income of the customer relationship management system. Required Operating Income (Req. Ol) = System Cost * Required return $96,000 $96,000 $96,000 RI of customer relationship management system = Profit - Req. Ol $64,000 $64,000 $64,000 e. Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system. RI after purchase = (NOI + 160,000)-(AOA +800,000)*Req. Return $604,000 $1,084,000 $24,000 f. What do you notice when comparing each division's combined residual income in part e. to their current residual income (prior to purchasing the CRM system) in part c.? By how much did they each increase? Increased by The residual income of each segement will increase when accepting the project. 8. If distribution channel managers are evaluated based on residual income, which managers will invest in the system? Explain. Explaination: All of them would invest because the residual income for each segment will increase. h. Why is the residual income for each distribution channel higher in part (b) than in part (a)? Explaination: Because % return from new system 160,000/800,000 = 20% is higher than the required return of 12%