37336176-CH-23-Solutions-Horngren-13th-Edition

# 37336176-CH-23-Solutions-Horngren-13th-Edition - CH 23...

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CH 23 Solutions Horngren 13 th Edition 23-18(10–15 min.) ROI and RI . 1. Operating income = (Contribution margin per unit × 150,000 units) – Fixed costs = (\$720 – \$500) × 150,000 – \$30,000,000 = \$3,000,000 ROI = Investment income Operating = \$3,000,000 ÷ \$48,000,000 = 6.25% 2. Operating income = ROI × Investment [No. of pairs sold (Selling price – Var. cost per unit)] – Fixed costs = ROI × Investment Let \$X = minimum selling price per unit to achieve a 25% ROI 150,000 (\$X – \$500) – \$30,000,000 = 25% (\$48,000,000) \$150,000X = \$12,000,000 + \$30,000,000 + \$75,000,000 X = \$780 3. Let \$X = minimum selling price per unit to achieve a 20% rate of return 150,000 (\$X – \$500) – \$30,000,000 = 20% (\$48,000,000) \$150,000X = \$9,600,000 + \$30,000,000 + \$75,000,000 X = \$764 1. The required division ROIs using total assets as a measure of investment is shown in the row labeled (1) in Solution Exhibit 23-22. SOLUTION EXHIBIT 23-22 New Car Division Performance Parts Division Total assets \$33,000,000 \$28,500,00 0 Current liabilities \$6,600,000 \$8,400,000 Operating income \$2,475,000 \$2,565,000 Required rate of return 12% 12% Total assets – current liabilities \$26,400,000 \$20,100,00 0 (1) ROI (based on total assets) (\$2,475,000 ÷ \$33,000,000; \$2,565,000 ÷ \$28,500,000) 7.5% 9.0% (2) RI (based on total assets – current liabilities) (\$2,475,000 – (12% × \$26,400,000); \$2,565,000 – (12% × \$20,100,000)) (\$693,000) \$153,000 (3) RI (based on total assets) (\$2,475,000 – (12% × \$33,000,000); \$2,565,000 – (12% × \$28,500,000)) (\$1,485,000) (\$855,000) 2. The required division RIs using total assets minus current liabilities as a measure of investment is shown in the row labeled (2) in the table above. 3. The row labeled (3) in the table above shows division RIs using assets as a measure of investment. Even with this new measure that is insensitive to the level of short-term debt, the New Car Division has a relatively

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worse RI than the Performance Parts Division. Both RIs are negative, indicating that the divisions are not earning the 12% required rate of return on their assets. 4. After-tax cost of debt financing = (1– 0.4) × 10% = 6% After-tax cost of equity financing = 15% Weighted average = cost of capital (\$18,000,000 6%) + (\$12,000,000 15%) \$18,000,000 + \$12,000,000 × × = 9.6% Operating income after tax 0.6 × operating income before tax \$ 1,485,000 \$1,539,000 (0.6 × \$2,475,000; 0.6 × \$2,565,000) Required return for EVA 9.6% × Investment (9.6% × \$26,400,000; 9.6% × \$20,100,000) 2,534,400 1,929,600 EVA (Optg. inc. after tax – reqd. return) \$(1,049,400 ) \$ (390,600 ) 5. Both the residual income and the EVA calculations indicate that the Performance Parts Division is
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## This note was uploaded on 05/12/2011 for the course ACCT 433b taught by Professor Alfredcontreras during the Spring '11 term at National.

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37336176-CH-23-Solutions-Horngren-13th-Edition - CH 23...

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