Essendon Pty Limited manufactures guidance systems for rockets that are used to launch commercial satellites. The company’s Software Business Division reported the following data for the last year: 

 

Sales revenue $2,000,000 

Sales returns $110,000 

Cost of goods sold $1,200,000 

Operating expenses $550,000 

Total assets at year-beginning $1,900,000 

Total assets at year-end $1,990,000 

Total current liabilities at year-beginning $55,000 

Total current liabilities at year-end $61,000 

 

The company’s required rate of return is 8.75 percent. Additional information: 

 

• The total assets at year-end include a piece of vacant land valued at $320,000. It is identified as a non-productive asset by the corporate management. 

• The divisional manager manages all current liabilities. 

• The use of average balances is recommended. 

In an attempt to improve its return on investment (ROI), Essendon company is planning to: 

• speed-up the collection of all account receivables by $70,000. 

• write-off and discard $57,000 of obsolete inventory. 

• sponsor a competition for teams of local universities’ students to design and build small satellite with budget up to $120,000 

 

Required:

a. Calculate the Software Business Division’s return on investment (ROI) and residual income (RI). Discuss the results from your calculations. 

Note: Textbook Chapter 13 “Learning objective 13.5-Measuring Profit and Invested capital” will be a good guide to define profit and invested capital in the ROI and RI calculations. 

b. Explain should the above plans be adopted in order to improve its ROI for Software Business Division? 

c. If profit and sales remain the same in the coming year, but the investment turnover increases to 0.92, calculate the new ROI?