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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.

Financial Statements

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 Mr. Frank and calculate the amount to 1 decimal place

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