Question
F#16 Bear Paints is a national paint manufacturer and retailer. LOADING... (Click the icon to view additional information.)Assume that management has specified a 20% target
F#16
Bear Paints
is a national paint manufacturer and retailer.
LOADING...
(Click the icon to view additional information.)Assume that management has specified a
20%
target rate of return. Read the requirements
LOADING...
.
Requirement 1. Calculate each division's ROI.
First enter the formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.)
|
|
| = | ROI |
Paint Stores |
|
| = |
| % |
Consumer |
|
| = |
| % |
Requirement 2. Calculate each division's sales margin. Interpret your results.
Enter the formula, then calculate the sales margin for each division. (Enter the sales margin as a percent rounded to the nearest hundredth of a percentage, X.XX%.)
|
|
| = | Sales margin |
Paint Stores |
|
| = |
| % |
Consumer |
|
| = |
| % |
Interpret your results.
The
Consumer
Paint Stores
Division is more profitable on each dollar of sales.
Requirement 3. Calculate each division's capital turnover. Interpret your results.
First enter the formula, then calculate the capital turnover for each division. (Round to two decimal places.)
|
|
| = | Capital turnover |
Paint Stores |
|
| = |
| times |
Consumer |
|
| = |
| times |
The
Consumer
Paint Stores
Division is more efficient in generating sales with its assets.
Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
First enter the expanded ROI formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.)
|
|
| = | ROI |
Paint Stores |
| % |
| = |
| % |
Consumer |
| % |
| = |
| % |
The Consumer Division's profitability on each dollar of sales is
higher
lower
than the Paint Stores Division's profitability. However, the Paint Store Division's efficiency is significantly
higher
lower
than the Consumer Division's efficiency. These results cause the Paint Stores Division's ROI to be
fairly similar to
higher than
lower than
the Consumer Division's ROI.
Requirement 5. Calculate each division's RI. Interpret your results and offer recommendations for any division with negative RI.
First enter the formula, then calculate the RI for each division. (Enter the amount in thousands. Use parentheses or a minus sign for negative residual incomes.)
|
| - | ( |
|
| ) = | RI |
|
Paint Stores |
| ( |
|
| % | ) | = |
|
Consumer |
| ( |
|
| % | ) | = |
|
Interpret your results and offer recommendations for any division with negative RI.
Both divisions are
Neither division is
Only the Consumer Division is
Only the Paint Stores Division is
meeting management's target rate of return. The
Consumer Division
Paint Store Division
should work on improving its
capital turnover rate
customer service
ROI
sales
total assets
. Improving this may help the division achieve positive residual income.
Requirement 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.
Most companies use the
average
beginning
ending
asset balance since the income used in the ROI calculation is earned over the year.
Management must also decide whether they wish to use the gross book value of assets or the net book value of assets.
The
gross
net
book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to
acquisitions of property
cash balance
depreciation
notes receivable
prepaid expenses
.
Requirement 7. Describe some of the factors that management considers when setting its minimum target rate of return.
|
|
|
|
|
|
Requirement 8. Explain why some firms prefer to use RI rather than ROI for performance measurement.
RI does a better job of
focusing on stockholders' and creditors rate of return
getting management to make sure their division is profitable
goal congruence
increasing the return on investment
.
Requirement 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.
Investment centers are responsible for
both generating profit and efficiently managing a divison's assets.
efficiently managing a division's assets.
generating profit.
Budget versus actual performance reports are insufficient because they do not measure
how efficiently the division uses its assets.
how much income the division generated.
Data table
Dialog content starts
The company is segmented into five divisions: Paint Stores (branded retail location), Consumer (paint sold through stores such as Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected hypothetical divisional information for the company's two largest divisions: Paint Stores and Consumer (in thousands of dollars).
| Sales | Operating Income | Total Assets |
---|---|---|---|
Paint Stores. . . | $3,880,000 | $465,600 | $1,552,000 |
Consumer. . . . | $1,200,000 | $180,000 | $1,600,000 |
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