QUESTION 2 (20 MARKS)

Innovating Motors Company makes electric cars and has two products, the iHybrid and the iBrilliant. To produce the iHybrid, Innovating Motors employed assets of $10,500,000 at the beginning of 2017 and $14,450,000 of assets at the end of 2017. Other costs to manufacture the iHybrid include the following:

Direct materials $5,000 per unit

Setup $1,500 per setup-hour

Production $ 415 per machine-hour

General administration and selling costs for iHybrid total $7,820,000 in 2017. During the year, Innovating Motors produced 11,000 iHybrid cars using 6,000 setup-hours and 139,000 machine-hours. It sold these cars for $12,000 each.

Required:

i. Assuming that Innovating Motors defines investment as average assets during the period, what is the return on investment for the iHybrid division? (11 marks)

ii. Calculate the residual income for iHybrid if Innovating Motors has a required rate of return of 16% on investments. (4 marks)

iii. Based on its values and strategic thrusts, Innovating Motors is committed to sustainable development and therefore takes a long-term perspective on profitability and divisional performance and is concerned about the overall performance of the organisation.Briefly

discuss the implications for the use of residual income and return on investment in the

context of this company's values. (5 marks)