P13.33ROI and residual income; missing data: manufacturer

PlumbWare Corporation has three divisions. The home plumbing division manufactures copper pipes for tradespersons and home renovators. These areas of the economy are in decline. The home plumbing division is operating with spare capacity and is using machinery that was acquired many years ago. The industrial pipes division produces pipes for heavy manufacturing industries involved in chemical refining and gas exploration. This division is machine intensive, using advanced computerised equipment to manufacture pipes to precise tolerance levels. The hardware division operates a hardware store. The following data relate to the three divisions. The company's minimum required rate of return is 8 per cent.

Home plumbing division

Industrial pipes division

Hardware division

Sales revenue

$25 000 000

?

?

Profit

$5 000 000

$1 000 000

?

Average investment

$10 000 000

?

?

Return on sales

?

20%

25%

Investment turnover

?

0.63 times

?

ROI

?

?

12.5%

Residual income

?

?

$180 000

Required:

1.Fill in the blanks in the data above.

2.Explain three ways in which the industrial pipes division's manager could improve the division's ROI. Use numbers to illustrate these possibilities.

3.Suppose that the home plumbing division's return on sales increased to 25 per cent, while its investment turnover remained constant. Calculate the division's new ROI.

4.Does ROI provide a suitable basis for comparing the performance of these three divisions? Explain your answer.