Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 3: (20 marks) Hudson Homes is a leading builder of luxury houses. Three years ago, Hudson expanded its business by acquiring Creation Homes, which

image text in transcribed
Question 3: (20 marks) Hudson Homes is a leading builder of luxury houses. Three years ago, Hudson expanded its business by acquiring Creation Homes, which gave Hudson a signicant presence in the project home market. Creation is managed as an investment center, and R01 is used to assess Creation's performance (with the average of beginning and end-ofyear investment balances being used in the ROI calculation). Bonuses for Creation's managers are also based in part on ROI. Investments made by Hudson Homes and its Creation division are expected to earn a minimum return of 16 per cent before income taxes. Creation's ROI has ranged from 19.3 to 22.1 per cent since it was acquired. Last year, Creation considered an investment opportunity with an estimated ROI of 18 per cent. Creation's management decided against the investment because they believed it would decrease their overall ROI. Last year's prot statement for Creation is provided below. The division's productive assets were $39 700 000 at year end, a 5 per cent increase over the prior year-end balance. Creation Homes division Prot statement for the year ended 31 December (in $'0005) Sales revenue $92 000 Cost of goods sold 67 400 Gross margin $24 600 Operating costs: Administrative '35 5 420 Selling 8 800 14 220 Prot from operations before income taxes S 10, 380 Required: 1. Calculate the following performance measures for last year for the Creation Homes division: 1. (a)return on investment (ROI) (5 marks) 2. (b)residual income. (5 marks) 2. Would the management of the Creation Homes division have been more likely to accept the investment opportunity if residual income had been used as a performance measure instead of ROI? Explain your answer. (5 marks) 3. Construct an Excel spreadsheet to show how the answers to requirement 1 will change if: (a) profit from operations was $9 100 000 (2.5 marks) (b) productive assets at year-end were $64 000 000. (2.5 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information Systems Controls And Processes

Authors: Leslie Turner, Andrea B. Weickgenannt

1st Edition

0471479519, 9780471479512

More Books

Students also viewed these Accounting questions

Question

7. How can an interpreter influence the utterer (sender)?

Answered: 1 week ago