Question

6:51 Mary's Auto Shop Inc. allows its divisions to operate as autonomous units. Their results for the current year were as follows: Revenues Current assets Capital assets Current liabilities Net operating income After-tax income Weighted average cost of capital Sport $1,700,000 230,000 870,000 100,000 238,000 188,300 10% Terrain $800,000 40,000 660,000 100,000 48,000 36,300 10% City $6,000,000 410,000 1,590,000 500,000 608,000 484,300 10% Required: For each division compute (to two decimal) the: 1. Return on sales in % 2. Return on investment (to two decimal) based on total assets employed in %

Answer 1

1) Return on sale in % is calculated as follows:

Sport:

Return on sale in % = Net Operating Income / Net Sales *100

                             = $238,000 / $1,700,000 *100

                              = 14%

Terrain:

Return on sale in % = Net Operating Income / Net Sales *100

                             = $48,000 / $800,000 *100

                              = 6%

City:

Return on sale in % = Net Operating Income / Net Sales *100

                             = $608,000 / $6000,000 *100

                              = 10.13%

2)Return on Investment based on total assets employed in % is calculated as follows:

Sport:

Return on Investment based on total assets employed in % = Net Operating Income / Total Assets Employed *100

   = Net Operating Income / (Capital Assets + Current Assets ) *100

                                                                      = $238,000 / ($870,000 + $230,000) *100      

= $238,000/ 1100,000*100           

= 21.64%       

Terrain:

Return on Investment based on total assets employed in % = Net Operating Income / Total Assets Employed *100

   = Net Operating Income / (Capital Assets + Current Assets ) *100

                                                                      = $48,000 / ($660,000 + $40,000) *100      

= $48,000/ 700,000*100           

= 6.86%   

City:

Return on Investment based on total assets employed in % = Net Operating Income / Total Assets Employed *100

   = Net Operating Income / (Capital Assets + Current Assets ) *100

                                                                      = $608,000 / ($1,590,000 + $410,000) *100      

= $608,000/ 2000,000*100           

= 30.4%