Mr. Frank is the Western Region Manager of JKL Canada Limited which is a subsidiary of a publicly traded Canadian firm that is traded on a major stock exchange.

The parent company has responsivity for all capital expenditure decisions of the subsidiary, and can dictate if the subsidiary must discontinue operations in a market segment and sell the associated assets used in this segment.

During 2019 the parent company told the subsidiary that it must discontinue product XYZ and late in 2019 JKL discontinued the production and sales of product XYZ. Specific assets held for disposition and not used in 2020 total have gross value of $41,667.

All entities are evaluated on the return on the assets invested and the required return must be at least 10% in order to earn annual bonuses which are scaled up as the ROI increases above the 10% required return.

For purposes of ROI, fixed assets are valued at gross value and not net value.

On the next pages you see condensed summary financial statements for JKL for the year ended December 31, 2020 and a proposed capital expenditure.

Financial Statements

JKL Canada Limited

Balance Sheet as at December 31, 2020

Item	$
Current assets	$45,000
Non-current assets	105,000
Total assets	$150,000
Current liabilities	$25,500
Long term debt	75,000
Equity	49,500
Total liabilities and equity	$150,000

Idle Assets $41,667

Required return from operations based on total 10% gross assets

JKL Canada Limited

Income Statement

for the year ended December 31, 2020

Item	$
Sales	$180,000
Cost of sales	115,500
Gross Margin	64,500
Selling and Administrative	45,000
Operating income	19,500
Interest at 6%	4,500
Net Income before tax	15,000
Income tax	4,900
Net income	$10,100

Questions for This Scenario

1. Comment on the appropriate return on investment calculation for Mr. Frank and calculate the amount to 1 decimal place.
2. Comment on the appropriate return on investment calculation for JKL Limited and calculate the amount to 1 decimal place.
3. Comment on the appropriate return on investment calculation for the publicly traded Canadian firm and calculate the amount to 1 decimal place.
4. Would Mr. Frank be motivated to make the capital investment at the present time? BRIEFLY justify your answer.
5. Do you think the bonus system suits the shareholders best interests? BRIEFLY justify your answer.