Part A

Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown as follows. The companys weighted-average cost of capital is 12 percent.

	Division A				Division B
Total assets	$	6,360,000			$	8,390,000
Current liabilities	$	800,000			$	1,950,000
After-tax operating income	$	1,120,000			$	1,225,600
ROI		20	%			15	%

Which division is more profitable in absolute dollars?

Compute the EVA for Division A and Division B.

Suppose the manager of Division A was offered a one-year project that would increase his investment base by $350,000 and show a profit of $35,000. Would the manager be motivated to invest in the new project?

Part B

Zylex Corporation has multiple factories across the United States. The upper management at Zylex evaluates each factory based on the capital turnover ratio from the DuPont system. The following is information for the factory in Pennsylvania for the past year.

Sales	$	3,600,000
Operating expenses		1,200,000
Total assets (prior to subtracting accumulated depreciation)		8,000,000
Accumulated depreciation		2,000,000

Compute the capital turnover ratio using (1) total assets and (2) assets net of depreciation.

Which investment base will the Pennsylvania factory manager prefer?

Part C

Zylex Corporation has multiple factories across the United States. The upper management at Zylex evaluates each factory based on the capital turnover ratio from the DuPont system. The following is information for the factory in Pennsylvania for the past year.

Sales	$	3,600,000
Operating expenses		1,200,000
Total assets (prior to subtracting accumulated depreciation)		8,000,000
Accumulated depreciation		2,000,000

Compute the ROI for the Pennsylvania factory using total assets and assets net of depreciation.

Find residual income if the company expects a 25 percent return on total assets.

Is the Pennsylvania factory performing up to managements expectations?

Part D

Wellinghouse Industries has established a 10 percent target ROI for its divisions. The following data have been gathered for the Ionia Divisions operations for the previous year: Revenues = $30,000,000; Expenses = $28,000,000; Invested capital = $11,200,000.

Calculate the ROI.

Did the Ionia Division meet the ROI target?

What is the Ionia Divisions residual income?

Part E

The weighted-average cost of capital for Forstone Corporation is 12 percent. Last year one of the divisions of Forstone generated an EVA of $5,000,000, while the divisions assets less its current liabilities were $35,000,000.

How much after-tax operating income did the division generate?