Question

Mary’s Auto Shop Inc. allows its divisions to operate as autonomous units. Their results for the current year were as follows:

              

  

	Sport	Terrain	City
Revenues	$1,700,000	$800,000	$6,000,000
Current assets	230,000	40,000	410,000
Capital assets	870,000	660,000	1,590,000
Current liabilities	100,000	100,000	500,000
Net operating income	238,000	48,000	608,000
After-tax income	188,300	36,300	484,300
Weighted average cost of capital	10%	10%	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 %
3. Economic value added
4. Residual income based on net operating income

Answer 1

Return on Sales Return on sales = Net Operating Income / Revenue*100 Revenue Net Operating income Return on sales Sport Terrian City $ 1,700,000 $ 800,000 $ 6,000,000 $ 238,000 $ 48,000 $ 608,000 14.00% 6.00% 10.13% Return on Investment Return on investment = Net Operating Income/Capital employed*100 Current assets Capital assets Total assets (A) Current liabilities (B) Capital employed (A-B) Net Operating income Return on investment Sport Terrian City $ 230,000 $ 40,000 $ 410,000 $ 870,000 $ 660,000 $ 1,590,000 $1,100,000 $700,000 $2,000,000 $ 100,000 $ 100,000 $ 500,000 $1,000,000 $600,000 $1,500,000 $ 238,000 $ 48,000 $ 608,000 23.80% 8.00% 40.53% Economic value added Economic value added = Net operating after tax income - Cost of capital Sport Terrian City $ 230,000 $ 40,000 $ 410,000 $ 870,000 $ 660,000 $ 1,590,000 $1,100,000 $700,000 $2,000,000 $ 100,000 $ 100,000 $ 500,000 $1,000,000 $600,000 $1,500,000 Current assets Capital assets Total assets Current liabilities Capital employed (A) Weighted average cost of capital (B) Cost of capital (A*B) Net Operating income after tax Economic value added 10% 10% 10% $ 100,000 $ 60,000 $ 150,000 $ 188,300 $ 36,300 $ 484,300 88,300 $ (23,700) S 334,300 S Residual income Residual Income = Net Operating Income - Cost of capital Net Operating income Cost of capital Residual Income Sport Terrian City $ 238,000 $ 48,000 $ 608,000 $ 100,000 $ 60,000 $ 150,000 $ 138,000 S (12,000) S 458,000