Mr$.$ Norman is the Western Region Manager of MNO 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 $2019$ MNO 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 MNO for the year

ended December $31,2020$ and a proposed capital expenditure.

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Questions for This Scenario

$1.$ Comment on the appropriate return on investment calculation for Mr$.$ Norman and

calculate the amount to $1$ decimal place.

$2.$ Comment on the appropriate return on investment calculation for MNO 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$.$ Norman 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.

Financial Statements

MNO Canada Limited

Balance Sheet as at December $31,2020$

Item $

Current assets $$40,500$

Non$-$current assets $94,500$

Total assets $$135,000$

Current liabilities $$22,950$

Long term debt $67,500$

Equity $44,550$

Total liabilities and equity $$135,000$

Idle Assets $$41,667$

Required return from

operations based on total $10\%$

gross assets

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MNO Canada Limited

Income Statement

for the year ended December $31,2020$

Item $

Sales $$162,000$

Cost of sales $103,950$

Gross Margin $58,050$

Selling and Administrative $40,905$

Operating income $17,145$

Interest at $6\%3,645$

Net Income before tax $13,500$

Income tax $4,500$

Net income $$9,000$

Capital expenditure

proposed $37,500$

Operating Income by year $1,500$ Year $1$

$3,000$ Year $2$

$4,500$ Year $3$

$13,500$ Year $4$

$22,500$ Year $5$

$22,500$ Year $6$

$22,500$ Year $7$

$22,500$ Year $8$

$22,500$ Year $9$

$22,500$ Year $10$