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 S1.700,000 $500,000 56,000,000 Current sits 230,000 40.000 410.000 Capital 870,000 660,000 1.500.000 Cureat liabilities | 100.000 100.000 500.000 Net operating income 236,000 46.000 6.000 After-tax income 168.200 36,300 484.200 Weighted average cost of capital 10% 109 Required: For each division compute to two decimal) the: 11. Return on sales in % 12. Return on investment (to two decimal) based on total assets employed in % 13. Economic value added

Answer 1

11) Return on Sales = Net operating income/Revenue*100

Sport = $236000/$1700000*100

= 13.88%

Terrain = $46000/$800000*100

= 5.75%

City = $606000/$6000000*100

= 10.1%

12)

Total Assets = Current Assets + Capital Assets

Sport = $230000 + $870000

= $1100000

Terrain = $40000 + $660000

= $700000

City = $410000 + $1590000

= $2000000

Return on Investment based on total assets = Net operating income/total assets*100

Sport = $236000/$1100000*100

= 21.45%

Terrain = $46000/$700000*100

= 6.57%

City = $606000/$2000000*100

= 30.3%

13) Economic Value Added = Net operating profit after tax (after tax income) - (Capital investement * Weighted average cost of capital )

Capital investement = Total assets - Current liablities

Sport = $1100000 - $100000

= $1000000

Terrain = $700000 - $100000

= $600000

City = $2000000 - $500000

= $1500000

Economiv Value Added:

Sport = $188200 - ($1000000*10%)

= $188200 - $100000

= $88200

Terrain = $36200 - ($600000*10%)

= $36200 - $60000

= - $23800

City = $484200 - ($1500000*10%)

= $484200 - $150000

= $334200