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 $8 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 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

Mindspin Labs
Desired ROI	18%
Average Assets	8	million
ROI = Net operating income/Average operating assets
Desired Operating Income	1.44	million
Desired Sales = Operating Assets*Turnover	24	million
Margin	6%
b.Net Income	0.48	million
Sales	15.48387097	million
Total asset turnover	5.1613	times

- A в с 0.18 million 1 Mindspin Labs 2 Desired ROI 3 Average Assets 4 ROI = Net operating income/Average operating assets 5 Desired Operating Income 6 Desired Sales - Operating Assets *Turnover 7 Margin 8 9 b.Net Income 10 Sales 11 Total asset turnover =B3*B2 =B3*3 =B5/B6 million million =3*16% million =B9/3.1% million =B10/3 times