N ULL. ROA target and for the last three years, it managed to maintain the top position among the divisions in terms of achieving the target, CASE 9-1. The Company was conservatively capitalized with a debt ratio of 0.2. The Company uses the straight-line method in depreciating its fixed assets, The Company's tax on profit is 32%. ne: THE PRODUCT (SHOESHOCK) GENERICS GROUP OF COMPANIES Shoeshock is the next generation multipurpose shoes designed to meet the demands of the discriminating urban walker, athletes and mountain climbers. Its unique sole is made of high quality non-slippery rubber that is oil and chemical resistant. It can endure tremendous punishment from both paved and unpaved areas of the urban jungle. Most of all, it utilizes an advanced technology called "Multi-celled Comfort Air Sole" which gives its user unparalleled comfort in all walking conditions. It is also water-resistant to emphasize its all-weather capability........ Stephen Manlapig, General Manager of the Shoe Division (Company) of Generics Group of Companies (Group), and Lianne Cabsaba, Financial Controller, together with Paolo Cortez, Research and Development Head, met to discuss the proposed addition of Shoe Shock to the Division's product line. Mr. Manlapig hopes ShoeShock will help his Division achieve its ROA target as set by Generics and thus entitle him to a performance bonus CONSIDERATIONS THE COMPANY In order to produce ShoeShock, the Company needs to purchase ar very sophisticated machinery to produce the soles amounting to about P12 million. To meet the expected high volume requirement of the Marketing Department, certain attachments and modifications will be made to the machinery, which will cost the Company P1 million. Based on the estimates prepared by the director for research and development, P2 million of additional wiring, lighting, warehouse facilities and modification of the production Floor to attain maximum efficiency of the line will be incurred. According to Mr. Cortez, the new machinery might not be adaptable for any other purpose. The Engineering Department, on the other hands determined that the machinery would have a 10-year useful life without any salvage value. Furthermore, it was estimated that ShoeShock, would have a gross profit higher by 5% as compared to the other Company's products. Generics is a very diversified company with interests in real estate, food and beverages, health and beauty, recreation and leisure, and fashion and accessories. The Group was initially organized as a medium-sized real estate developer in 1950s and started to diversify in the 1960s as part of its strategy to spread the risks involved in the development of real estate projects. Currently, the Group has consolidated assets of over Pl billion with sales to assets ratio of 1.1. Last year, the Group reported a consolidated net income of about P75 million. One of the Group's measures in evaluating the performance of its divisions is ROA It has been the Group's policy to adopt a single ROA target for all its divisions. All general managers must commit to this target ROA For the current year, the Group decided that a 13%-target ROA is reasonable. AVA The Shoe Division is the newest addition to the Group. It was acquired (100%) by Generics in 1984 from a prominent Marikina family who lost interest is the production of shoes. Presently, the Company's total assets is about P50 million but has a contribution of about 10% to the Group's consolidated net income. Over the past ten years, the Company has consistently surpassed the Based on the maket research conducted and sales forecast prepared by the marketing manager, siles for the next two years were forecast at p90.289.000 and P107458,000. On these amounts, it was estimated that ShoeShock would contribute PS:,000 and P16486,000, respectively. However, Ms. de Guzman is uncertain about ShoeShack's llfe cycle She knew that the Company's average product life cycle is four years 355 6. Mr. Manlapig is concemned about the potential impact on his division's ROA if the planned introduction of Shoe Shock were to be introduced. He knows that the net income and asset base of the division, and the overall profitability of the Group would be significantly affected by his decision Exhibits 1 and 2). Furthermore, he has to present to top management within the next two weeks any major investment that he plans to make if he intends to pursue the introduction of ShocShock within the year. GUIDE QUESTIONS 13Should the Shoeshock project be implemented? Show supporting was computations. Assume that there will be no change in the working capital policies of Generics hence the relationship between the level of sales and working capital prevailing during current year shall hold true for the duration of the implementation of Shoeshock. Comment on the divisional performance evaluation system of Generics Company EXHIBIT 1 Shoe Division Income Statement (for the recent calendar year) . (in thousands) Sales P75,229 Cost of Goods Sold 25,679 Gross Profit P49,550 Operating Expenses: Seling, general, administrative, and interest P27,741 Depreciation 10272 38,513 Operating Income P11,037 Income Tax $73,532- Net Income P7,505 "Cost of goods sold does not include depreciation expense. EXHIBIT 2. Shoe Division Balance Sheet (as of the recent calendar year) (in thousands) Current Assets Plant Assets P12,949 37,244 750,195 Current Liabilities Bank Loan Stockholders' Equity P2.437 2,533 40,173 P50,1931 N ULL. ROA target and for the last three years, it managed to maintain the top position among the divisions in terms of achieving the target, CASE 9-1. The Company was conservatively capitalized with a debt ratio of 0.2. The Company uses the straight-line method in depreciating its fixed assets, The Company's tax on profit is 32%. ne: THE PRODUCT (SHOESHOCK) GENERICS GROUP OF COMPANIES Shoeshock is the next generation multipurpose shoes designed to meet the demands of the discriminating urban walker, athletes and mountain climbers. Its unique sole is made of high quality non-slippery rubber that is oil and chemical resistant. It can endure tremendous punishment from both paved and unpaved areas of the urban jungle. Most of all, it utilizes an advanced technology called "Multi-celled Comfort Air Sole" which gives its user unparalleled comfort in all walking conditions. It is also water-resistant to emphasize its all-weather capability........ Stephen Manlapig, General Manager of the Shoe Division (Company) of Generics Group of Companies (Group), and Lianne Cabsaba, Financial Controller, together with Paolo Cortez, Research and Development Head, met to discuss the proposed addition of Shoe Shock to the Division's product line. Mr. Manlapig hopes ShoeShock will help his Division achieve its ROA target as set by Generics and thus entitle him to a performance bonus CONSIDERATIONS THE COMPANY In order to produce ShoeShock, the Company needs to purchase ar very sophisticated machinery to produce the soles amounting to about P12 million. To meet the expected high volume requirement of the Marketing Department, certain attachments and modifications will be made to the machinery, which will cost the Company P1 million. Based on the estimates prepared by the director for research and development, P2 million of additional wiring, lighting, warehouse facilities and modification of the production Floor to attain maximum efficiency of the line will be incurred. According to Mr. Cortez, the new machinery might not be adaptable for any other purpose. The Engineering Department, on the other hands determined that the machinery would have a 10-year useful life without any salvage value. Furthermore, it was estimated that ShoeShock, would have a gross profit higher by 5% as compared to the other Company's products. Generics is a very diversified company with interests in real estate, food and beverages, health and beauty, recreation and leisure, and fashion and accessories. The Group was initially organized as a medium-sized real estate developer in 1950s and started to diversify in the 1960s as part of its strategy to spread the risks involved in the development of real estate projects. Currently, the Group has consolidated assets of over Pl billion with sales to assets ratio of 1.1. Last year, the Group reported a consolidated net income of about P75 million. One of the Group's measures in evaluating the performance of its divisions is ROA It has been the Group's policy to adopt a single ROA target for all its divisions. All general managers must commit to this target ROA For the current year, the Group decided that a 13%-target ROA is reasonable. AVA The Shoe Division is the newest addition to the Group. It was acquired (100%) by Generics in 1984 from a prominent Marikina family who lost interest is the production of shoes. Presently, the Company's total assets is about P50 million but has a contribution of about 10% to the Group's consolidated net income. Over the past ten years, the Company has consistently surpassed the Based on the maket research conducted and sales forecast prepared by the marketing manager, siles for the next two years were forecast at p90.289.000 and P107458,000. On these amounts, it was estimated that ShoeShock would contribute PS:,000 and P16486,000, respectively. However, Ms. de Guzman is uncertain about ShoeShack's llfe cycle She knew that the Company's average product life cycle is four years 355 6. Mr. Manlapig is concemned about the potential impact on his division's ROA if the planned introduction of Shoe Shock were to be introduced. He knows that the net income and asset base of the division, and the overall profitability of the Group would be significantly affected by his decision Exhibits 1 and 2). Furthermore, he has to present to top management within the next two weeks any major investment that he plans to make if he intends to pursue the introduction of ShocShock within the year. GUIDE QUESTIONS 13Should the Shoeshock project be implemented? Show supporting was computations. Assume that there will be no change in the working capital policies of Generics hence the relationship between the level of sales and working capital prevailing during current year shall hold true for the duration of the implementation of Shoeshock. Comment on the divisional performance evaluation system of Generics Company EXHIBIT 1 Shoe Division Income Statement (for the recent calendar year) . (in thousands) Sales P75,229 Cost of Goods Sold 25,679 Gross Profit P49,550 Operating Expenses: Seling, general, administrative, and interest P27,741 Depreciation 10272 38,513 Operating Income P11,037 Income Tax $73,532- Net Income P7,505 "Cost of goods sold does not include depreciation expense. EXHIBIT 2. Shoe Division Balance Sheet (as of the recent calendar year) (in thousands) Current Assets Plant Assets P12,949 37,244 750,195 Current Liabilities Bank Loan Stockholders' Equity P2.437 2,533 40,173 P50,1931