|
Kenneth Washburn, head of the
Sporting Goods Division of Reliable Products, has just completed a miserable
nine months. “If it could have gone wrong, it did. Sales are down, income is
down, inventories are bloated, and quite frankly, I’m beginning to worry
about my job,” he moaned. Washburn is evaluated on the basis of ROI. Selected
figures for the past nine months follow.
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|
|
|||
|
Sales
|
$
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4,800,000
|
|
|
Operating income
|
360,000
|
||
|
Invested capital
|
6,000,000
|
||
|
|
|||
|
In
an effort to make something out of nothing and to salvage the current year’s
performance, Washburn was contemplating implementation of some or all of the
following four strategies:
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|
a.
|
Write off and discard $60,000 of
obsolete inventory. The company will take a loss on the disposal.
|
|
b.
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Accelerate the collection of
$80,000 of overdue customer accounts receivable.
|
|
c.
|
Stop advertising through year-end
and drastically reduce outlays for repairs and maintenance. These actions are
expected to save the division $150,000 of expenses and will conserve cash
resources.
|
|
d.
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Acquire two competitors that are
expected to have the following financial characteristics:
|
|
Projected
Sales |
Projected
Operating
Expenses |
Projected
Invested
Capital |
|||||||||
|
Anderson Manufacturing
|
$
|
3,000,000
|
$
|
2,400,000
|
$
|
5,000,000
|
|||||
|
Palm Beach Enterprises
|
4,500,000
|
4,120,000
|
4,750,000
|
||||||||
|
Required:
|
|||||||||||
|
1-a.
|
Briefly define sales margin,
capital turnover, and return on investment.
|
||||||||||
|
|
|
|
Sales margin
|
Income divided by sales revenue
 |
|
Capital turnover
|
Sales revenue divided by invested
capital
|
|
Return on investment
|
Income divided by invested capital
|
|
|
|
|
1-b.
|
Compute sales margin, capital
turnover, and return on investment for the Hardware Division over the past
nine months. (Omit the "%" sign in your
response. Round your answers to 2 decimal places.)
|
|
|
|
|
Sales margin
|
7.5
% |
|
Capital turnover
|
80
% |
|
Return on investment
|
6
% |
|
3.
|
Are there possible long-term
problems associated with strategy (c)?
|
|
|
|
||
|
Yes
|
||
|
4-a.
|
Determine the ROI of the
investment in Anderson Manufacturing and do the same for the investment in
Palm Beach Enterprises. (Omit the "%"
sign in your response.)
|
|
|
|
|
|
Anderson Manufacturing
ROI
|
12
% |
|
Palm Beach Enterprises
ROI
|
8
% |
|
|
|
|
4-b.
|
Should Washburn reject both
acquisitions, accept both the acquisitions, acquire Anderson Manufacturing or
acquire Palm Beach Enterprises in order to maximize the ROI?
|
|
|
|
|
|
Acquire Anderson Manufacturing
|
