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Your company has five lines of business, here simply numbered 1 through 5. Each business line uses services from the company's accounting, information technology (IT),

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Your company has five lines of business, here simply numbered 1 through 5. Each business line uses services from the company's accounting, information technology (IT), and warehousing departments. The table below gives the revenues, direct costs, and capital (e.g., the value of property, plant, and equipment) for each line of business. You are also given the variable costs from the three service departments. Fixed costs for the service departments can be ignored. All dollar figures are in millions of dollars. Business # 1 2 3 4 5 Revenue $25 $30 $5 $15 $25 Total direct cost: $18 $26 $4 $11 $21 Capital invested $12 $12 $12 $12 $22 Service division Total variable costs Accounting $2 IT $3 Warehousing $5 For each business, calculate the return on capital, but ignore the indirect costs from the three service divisions. This is calculated as (revenue - total direct costs)/capital invested. You will enter this information, to three decimal places, in Moodle. A return of 12.46 percent would be reported as 0.125.As an executive in this company you are concerned with the following: (1) the businesses have little incentive to reduce their requests for services from the three service divisions; (2) the service divisions are unable to tie their requested budgets to the value of their services; and (3) some of the businesses may have low returns on capital and should be sold off. To initially address these issues you are imposing an internal pricing system, where each of the three service divisions charge the businesses for the services provided. The expected percentage allocation of the variable costs from each service division to each business are given in the matrix below. Notice that the sum of the allocations from a service division sum to 1.0. Allocation share to each business from each service division Service division 1 2 3 4 5 Accounting 0.10 0.15 0.20 0.25 0.30 IT 0.25 0.20 0.15 0.10 0.30 Warehousing 0.30 0.20 0.15 0.10 0.25 Use this information to allocate the service divisions' variable costs to the five businesses. Recalculate the return on capital for each of the five businesses. You will enter this information, to three decimal places, in Moodle. Suppose that the market rate of return for similarly risky investments is 8.5 percent. If you took the approach of Goizueta at Coca-Cola, as discussed in ML204, which businesses should be sold? Excel tip: Use Excel's =SUMPRODUCT function to sum each business line's internal costs. The formula for Business Line 1 is shown below. 2.45

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