Question 3

Essendon Pty Limited manufactures guidance systems for rockets that are used to launch

commercial satellites. The companys Software Business Division reported the following data

for the last year:

Sales revenue $2,000,000

Sales returns $110,000

Cost of goods sold $1,200,000

Operating expenses $550,000

Total assets at year-beginning $1,900,000

Total assets at year-end $1,990,000

Total current liabilities at year-beginning $55,000

Total current liabilities at year-end $61,000

The companys required rate of return is 8.75 percent. Additional information:

The total assets at year-end include a piece of vacant land valued at $320,000. It is

identified as a non-productive asset by the corporate management.

The divisional manager manages all current liabilities.

The use of average balances is recommended.

In an attempt to improve its return on investment (ROI), Essendon company is planning to:

speed-up the collection of all account receivables by $70,000.

write-off and discard $57,000 of obsolete inventory.

sponsor a competition for teams of local universities students to design and build

small satellite with budget up to $120,000

Required:

a. Calculate the Software Business Divisions return on investment (ROI) and residual

income (RI). Discuss the results from your calculations.

Note: Textbook Chapter 13 Learning objective 13.5-Measuring Profit and Invested

capital will be a good guide to define profit and invested capital in the ROI and RI

calculations.

b. Explain should the above plans be adopted in order to improve its ROI for Software

Business Division?

c. If profit and sales remain the same in the coming year, but the investment turnover

increases to 0.92, calculate the new ROI?