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 18% on an asset base that has averaged $6 million. To achieve this ROI, average total asset turnover of 3 was required. If the company shifts its operations from manufacturing to providing maintenance services, it is estimated that average total assets will decrease to $3 million. Required: a. Calculate net income, margin, and sales required for Mindspin Labs to achieve its target ROI as a manufacturing firm. b. Assume that the average margin of maintenance service firms is 2.90%, and that the average ROI for such firms is also 17%. 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 17% ROI. Complete this question by entering your answers in the tabs below. Required A Required B Calculate net income, margin, and sales required for Mindspin Labs to achieve its target ROI as a manufacturing firm. (Enter your "Sales" and "Net income" answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations. Round your answers to 2 decimal places.) IS Net income Margin Sales 1.08 million 6.00% million Required A Required BΣ.

Answer 1

Solution: a) ROI=Net income/Average assets 0.18=Net income/6 Net income=0.18*6 Net income 1.08 million 6.00% Margin=ROI/Asset turnover 0.18/3 Asset turnover=sales/average assets 3=Sales/6 sales=3*6 sales= 18 million b) Net in come=average assets *ROI Net income=3*0.17 Net income 0.51 million 5.86207 Asset turnover=ROI/Margin 0.17/0.029 Margin=net income/sales 0.029=0.51/sales sales=0.51/0.029 Sales 17.59 5.86 times Asset turnover-sales/average assets 17.59/3