Question

Question 1 (performance evaluation: RI, ROI) Generic Motors Corporation has two divisions, Kadillack and Chevrolay. Their performance for last year is as follows. Kadillack Chevrolay Investment (operating assets) $200 million $800 million Profit $40 million $120 million The required rate of return (cost of capital) for Generic Motors is 10% a year. Required: a) What is the return on investment (ROI) for each division? Kadillack ROI = 0 % (enter say 9.5% as 9.5, not as 0.095 and not as 9.5%) Chevrolay ROI = % Which division performs better, based on ROI? (1=Kadillack, 2=Chevrolay) b) What is the residual income (RI) for each division? Kadillack RI = $ million (enter say $3.52 million as 3.52, not as 3,520,000) Chevrolay RI = $ million Which division performs better, based on RI? (1=Kadillack, 2=Chevrolay) c) Which of the two measures (ROI or RI) would you use to decide which division performs better? (1=ROI, 2=RI)

Answer 1

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Question 1
Generic Motors
Ans a
Particulars	Kadillack	Chevrolay	Note
Profit	40.00	120.00	A
Operating Assets	200.00	800.00	B
ROI	20.00%	15.00%	C=A/B
Kadillack performs better.
Ans b	Kadillack	Chevrolay	Note
Required Rate of return	10%	10%	D
Operating Assets	200.00	800.00	See B
Minimum Return	20.00	80.00	E=D*B
Profit	40.00	120.00	See A
Residual Income	20.00	40.00	F=E-A
Chevrolay performs better.
Ans c	Residual Income method should be used.
Question 2
DuPont Method
Ans a
Particulars	Apple	Dell	Note
Profit	6,275.00	3,190.00	G
Total Assets	32,460.00	27,031.00	H
ROI	19.33%	11.80%	I=G/H
Ans b
Particulars	Apple	Dell	Note
Sales	32,479.00	61,101.00	J
Profit	6,275.00	3,190.00	See G
Total Assets	32,460.00	27,031.00	See H
Profit Margin	19.32%	5.22%	K=G/J
Asset Turnover	1.00	2.26	L=J/H
ROI	19.33%	11.80%	M=K*L	This matches with Note I above as required by question.
Ans c
Apple has highest profit margin.
Ans d
Dell has highest Asset Turnover.
Question 3
Wast Company
Manufacturing cycle efficiency measures the proportion of production time spent on value-added activities.
To calculate the measurement, divide value-added production time by total cycle time.
Total cycle time is the aggregate amount of all process time, inspection time, queue time, and move time.
Activity	Days	Remarks	Reason
Inspection	1.00	Non Value Added activity	It does not add any value to production.
Process Time	2.00	Value Added activity	It adds value to production.
Wait Time	10.00	Non Value Added activity	It does not add any value to production.
Queue Time	15.00	Non Value Added activity
Move Time	12.00	Non Value Added activity
Answer 1
Delivery Cycle Time	40.00
(Time taken by Value added and non Value added activities)
Answer 2
Manufacturing cycle Time	2.00
(Process Time)
Answer 3
Manufacturing cycle efficiency	5.0%
(Manufacturing cycle Time/Delivery Cycle Time)
Answer 4
Activity	Days	Remarks
Inspection	1.00	Non Value Added activity
Process Time	2.00	Value Added activity
Wait Time	10.00	Non Value Added activity
Move Time	12.00	Non Value Added activity
Delivery Cycle Time	25.00
(Time taken by Value added and non Value added activities)
Manufacturing cycle Time	2.00
(Process Time)
Manufacturing cycle efficiency	8.0%
(Manufacturing cycle Time/Delivery Cycle Time)