Question

Mindspin Labs Inc. is a manufacturing firm that has experienced strong competition in its traditional business. Management is considering joining the trend to the "service economy" by eliminating its manufacturing operations and concentrating on providing specialized maintenance services to other manufacturers. Management of Mindspin Labs has had a target ROI of 16% on an asset base that has averaged $8 million. To achieve this ROI, average total asset turnover of 2 was required. If the company shifts its operations from manufacturing to providing maintenance services, it is estimated that average total assets will decrease to $2 million.

Required: Calculate net income, margin, and sales required for Mindspin Labs to achieve its target ROI as a manufacturing firm. Assume that the average margin of maintenance service firms is 3.10%, and that the average ROI for such firms is also 16%.

Calculate the net income, sales, and total asset turnover that Mindspin Labs will have if the change to services is made and the firm is able to earn an average margin and achieve an 16% ROI.

Answer 1

Inswer page-01 Required calculating margin, sales required and net inume. the following formula is used to calculate - margin 16.1. ROL = ( Margin x 9 Teernover) margin = 8.1. Sales are calculated by multiplying the average total assets and turnover. famula shown below di turnovert - ( sales 14 8000000 Average total asset) Sales = $16000000 : net income is calculated by multiplying the sales with margin. *Bil. margin = (net income | #16000000 sales) Inel income = $ 1080000

page: 02 again calculating net income twin over and sales net income is calculated by multiplying the return on investment with the average total assets. 16.1.Rol = ( net income * 2000,000 Average total asset) net income = $ 3200001 Divide the set win on investment with the margin to achieve turnover as shown below 16. ROL = ( 3.60.1. morgin I Turnover) Turnover = 5,1 times. sales are calculated by multiplying the average total assets and the turnover. 5.1 - Twin over = (sales! $ 22,000,000 Average total i : asiets) Sales - ¢10200000