PROBLEM #1: NO GOOD DEED GOES UNPUNISHED
Larry Simmons manages the Sporting Goods division of All-Sports Inc. All Sports Inc. tracks the return on investment of each division. All Sports Inc. rewards its managers with a $3,000 bonus for each percentage point their return on investment exceeds a target rate of 8%. The Sporting Goods division reported the following departmental income last year:
Sales $8,490,000
Cost of goods sold 4,250,000
Gross profit 4,240,000
Operating expenses 3,040,000
Net income $1,200,000
The average invested assets for the Sporting Goods division are $8,000,000.
Due to Larry's outstanding performance, the top management of All-Sports Inc.has decided Larry should also manage a new division, Sportswear. The Sportswear division will require average invested assets of $2,000,000, and is projected to earn net income of $100,000.
Required:
- Compute Larry's bonus from managing the Sporting Goods division.
- Compute Larry's bonus if he manages both the Sporting Goods and Sportswear divisions.
- 3. How do you think Larry will react when assigned the Sportswear division, after computing his expected bonus from managing both the Sporting Goods and Sportswear divisions?
PROBLEM #2: THE CASE OF THE WEASELY PLANT MANAGER
Santini Corporation's budget for the first quarter of the year includes the following:
Planned Unit Sales 10,000
Sales $1,000,000
Fixed manufacturing costs:
Salaries $95,000
Utilities 7,500
Factory Rent 45,000
Maintenance/other 9,500
Total fixed manufacturing costs $157,000
Variable manufacturing costs:
Direct materials $300,000
Direct labor 250,000
Other 100,000
Total variable manufacturing costs $650,000
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Actual results for the first quarter were as follows:
Actual Unit Sales 8,000
Sales $800,000
Fixed manufacturing costs:
Salaries $95,000
Utilities 7,500
Factory Rent 45,000
Maintenance/other 9,500
Total fixed manufacturing costs $157,000
Variable manufacturing costs:
Direct materials $250,000
Direct labor 232,500
Other 95,000
Total variable manufacturing costs $577,500
The plant manager believes he is due a bonus, as actual variable manufacturing costs were much lower than the budget.
Required:
1. Prepare a flexible budget for sales at actual levels.
2. Respond to the plant manager's request in a memo
PROBLEM #3: RETURN ON INVESTMENT (ROI), OR, HOW DO I SAVE MY JOB
A divisional income statement for the Snack Cake Division of Wholesome Fresh Bakery, Inc.follows:
Sales $600,000
Cost of goods sold 360,000
Gross profit 240,000
Operating expenses 168,000
Income from operations $ 72,000
The average invested assets of the Snack Cake Division total $600,000. The Snack Cake Division receives no allocation of service charges or corporate fixed costs. The president of Wholesome Fresh Bakery, Inc.indicated that the division's ROI must be increased to at least 20% by the end of next year or the division will be sold. The division manager is considering the following three proposals:
Proposal 1: Transfer equipment with a book value of $120,000 to other divisions at no gain or loss. Similar equipment would be leased. The annual lease payments would add $18,000 to cost of goods sold. Average invested assets would be reduced by $120,000.
Proposal 2: Purchase new and more efficient machinery. This would reduce cost of goods sold by $48,000. Sales and operating expenses would remain unchanged. The old machinery would be scrapped at no gain or loss. Average invested assets would increase by $150,000.
Proposal 3: Reduce average invested assets by discontinuing a product line. This would eliminate sales of $180,000. Cost of goods sold would be reduced by $133,200, and operating expenses would decrease by $42,000. Assets of $300,000 would be transferred to other divisions at no gain or loss. The transfer of these assets would reduce average invested assets by $300,000.
Required:
1. Compute the return on investment for the current year.
2. Prepare forecasted income statements and compute average invested assets for each proposal. Each proposal is independent of the other two proposals.
3. Compute the return on investment for each proposal.
4. Which of the three proposals meets the 20% ROI requirement?