Ch 11 Reporting for Control ROI

Ch 11 Reporting for Control ROI - ADM 2341 Reporting for...

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1 Ch 11 Reporting for Control Achieves focus on profit and the assets devoted Return on Investment: to achieving the profit. ROI = margin times turnover or (Net Income ÷Sales)*(Sales ÷ Invested Capital) Invested Capital is usually measured by Average Operating Assets(AOA) 1 Ch. 11 ADM 2341 Reporting for Control ROI
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2 Economic Value Added (EVA)/Residual Income (RI) Dollar amount that the investment centre earns above some minimum return on its operating assets Economic Value Added = Net Income – (Minimum Return)*(Invested Capital) or, in shorthand EVA = NI – (X%)*(AOA) 2 Ch. 11 ADM 2341 Reporting for Control ROI X = Required Rate of Return RRR
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3 Example: Marsh Company; minimum rate of return is 10% ROI vs EVA Divisions Whole Company A B Net Income $500 $100 $600 Capital/AOA $2,000 $4,000 $6,000 R.O.I .. . . ? . . . ? R.I./EVA (Minimum = 10% return) 3 Ch. 11 ADM 2341 Reporting for Control ROI
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4 New Project: Investment $1,000 Net Income $150 Accept/Reject? ROI RI/EVA 4 Ch. 11
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Unformatted text preview: ADM 2341 Reporting for Control 5 Examples: Canada Company, Divisions (Fill in the ?s) Central West East ? 280 Income 4,500 7,000 $9,000 Sales 14% 18% ROI 1,800 3,000 AOA* 320 $s 15% 16% Min RRR** % 90 RI/EVA*** * ** *** 5 Ch. 11 ADM 2341 Reporting for Control Average Operating Assets Required Rate of Return, Residual Income/Economic Value Added 6 Examples: Ontario Company, What Ifs? Sales VC CM $4,000k 2,800k 1,200k M FC NI , 00k 840k 360k AOA = $2,000 Min RRR = 16% ROI and EVA? What if? Each action is stand alone. 1. JIT is implemented and Inventory drops by $400k, $400k in debt is paid off. 2. Sales are increased by 20%. No change in assets. 3. New assets of $500k purchased using debt. Production costs are reduced by $20k. 6 Ch. 11 ADM 2341 Reporting for Control ROI 4. Obsolete inventory of $40k is written off....
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Ch 11 Reporting for Control ROI - ADM 2341 Reporting for...

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