# hw12 - ORIE 350 Homework#12 Due Nov 21 2006 1 Westfall...

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ORIE 350 Homework #12 Due Nov. 21, 2006 1. Westfall Industries has two divisions, Cortland and Bradford. Each is run as an investment center. In the past year, the following data was collected: Cortland Bradford Sales \$4,500,000 \$10,000,000 Net Operating Income 315,000 900,000 Less: Income Tax 110,250 315,000 Net Income 204,750 585,000 Average Operating Assets 1,500,000 5,000,000 a. Compute the ROI for each division. Cortland: ROI = 315,000 / 1,500,000 = 21% Bradford: ROI = 900,000 / 5,000,000 = 18% b. Compute the residual income for each division, assuming the minimum acceptable return is 15% Cortland: Residual Income = 315,000 – (1,500,000)(0.15) = \$90,000 Bradford: Residual Income = 900,000 – (5,000,000)(0.15) = \$150,000 c. Which division is better, based on ROI? The Cortland Division is better, since it has the higher ROI. d. Which division is better, based upon residual income? One cannot make this assessment, since residual income cannot be used to rank order two or more divisions with non-negative residual incomes.

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2. Tyra Banks Industries makes swimwear, broken up into Fashion and Competition divisions. During the past year, the financial data for the Competition Division were as follows: Sales \$13,600,000 Cost of Goods Sold 6,160,000 Division Selling and G&A Expenses 4,100,000 Allocated Corporate Expenses: Interest 1,250,000 Allocated Corporate Expenses: Headquarters 1,000,000 Division Operating Assets, 1st quarter 12,000,000 Division Operating Assets, 2nd and 3rd quarters 13,250,000 Division Operating Assets, 4th quarter 16,000,000 a) What is the controllable margin for the Competition Division? Controllable margin = 13,600,000 – 6,160,000 – 4,100,000 = \$3,340,000 b) What was the return on investment for the Competition Division? Please express your answer in terms of a percentage. AOA = (12,000,000 + (2)(13,250,000) + 16,000)/4 = 13,625,000 ROI = 3,340,000 / 13,625,000 = 24.51%
3. Financial data for Bridger Inc. for last year follows: Bridger Inc. Balance Sheet Dec. 31, 2005 Dec. 31, 2004 Assets Cash \$130,000 \$125,000 Accounts Rec. 480,000 340,000 Inventory 490,000 570,000 Plant and Equip. (net) 820,000 845,000 Investment, AFSS 680,000 650,000 Total Assets \$2,600,000 \$2,530,000 Liabilities Accounts Payable \$340,000 \$380,000 Long-Term Debt 1,000,000 1,000,000

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• Spring '08
• CALLISTER
• Balance Sheet, Generally Accepted Accounting Principles, residual income, FLC

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