Key Information For The Plant City Division
Key information for the Plant City Division (PCD) of Barkley Industries for 2015 are as follows:
Revenues $15,000,000
Operating Income 1,800,000
Total Assets 10,000,000
PCD managers are evaluated and rewarded on the basis of ROI defined as operating income divided by total assets. Barkley Industries expects its divisions to increase ROI each year.
Next year, 2016, appears to be a difficult year for PCD. PCD had planned a new investment to improve quality but, in view of poor economic conditions, has postponed the investment. ROI for 2016 was certain to decrease if PD had made the investment.
Management is now considering ways to meet its target ROI of 20% for next year. It anticipates revenues to be steady at $15 million in 2016.
Required:
(a) Calculate PCD's return on sales and ROI for 2015.
(b) (1) By how much would PCD need to cut costs in 2016 to achieve its target ROI of 20%, assuming no change in total assets between 2015 and 2016?
(b)(2) By how much would PCD need to decrease total assets in 2016 to achieve its target ROI of 20%, assuming no change in operating income between 2015 and 2016?
(c) Calculate PCD's Residual Income (RI)* in 2015, assuming a required rate of return on investment of 15%.
(d) PCD wants to increase RI by 50% in 2016. Assuming it could cut costs by $45,000 in 2016, by how much would PCD need to decrease total assets in 2016?
(e) Barkley Industries is concerned that the focus on cost cutting, asset sales and no new investments will have an adverse long-run effect on PCD's customers. Yet Barkley wants PCD to meet its financial goals. What other measurements, if any do you recommend that Barkley use? Explain briefly.