Question
ROI Mr. Frank is the Western Region Manager of JKL Canada Limited which is a subsidiary of a publicly traded Canadian firm that is traded
ROI
Mr. Frank is the Western Region Manager of JKL Canada Limited which is a subsidiary of a publicly traded Canadian firm that is traded on a major stock exchange. The parent company has responsivity for all capital expenditure decisions of the subsidiary, and can dictate if the subsidiary must discontinue operations in a market segment and sell the associated assets used in this segment. During 2019 the parent company told the subsidiary that it must discontinue product XYZ and late in 2019 JKL discontinued the production and sales of product XYZ. Specific assets held for disposition and not used in 2020 total have gross value of $41,667. All entities are evaluated on the return on the assets invested and the required return must be at least 10% in order to earn annual bonuses which are scaled up as the ROI increases above the 10% required return.
For purposes of ROI, fixed assets are valued at gross value and not net value.
On the next pages you see condensed summary financial statements for JKL for the year ended December 31, 2020 and a proposed capital expenditure.
JKL Canada Limited
Balance Sheet as at December 31, 2020
Item | $ |
Current assets | $45,000 |
Non-current assets | 105,000 |
Total assets | $150,000 |
|
|
Current liabilities | $25,500 |
Long term debt | 75,000 |
Equity | 49,500 |
Total liabilities and equity | $150,000 |
Idle Assets $41,667
Required return from operations based on total 10% gross assets
JKL Canada Limited
Income Statement
for the year ended December 31, 2020
Item | $ |
Sales | $180,000 |
Cost of sales | 115,500 |
Gross Margin | 64,500 |
Selling and Administrative | 45,000 |
Operating income | 19,500 |
Interest at 6% | 4,500 |
Net Income before tax | 15,000 |
Income tax | 4,900 |
Net income | $10,100 |
Question: Comment on the appropriate return on investment calculation for JKL Limited and calculate the amount to 1 decimal place.
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