Mallory, Inc. has the following data available for two of its divisions for last year: Asian Division European DivisionSales$460,000 $900,000 Contribution Margin 184,000 470,000 Operating income 92,000 90,000 Average operating assets 368,000 750,000 Weighted average cost of capital 14% 14%The tax rate for Mallory, Inc. is 18%.Required:(1) Compute the following for each division:(a) Profit margin.(b) Asset turnover.(c) ROI.(d) Residual income.(e) EVA (assume there are no current liabilities).(2) Briefly discuss which division appears most successful and why?
What will be an ideal response?
(1)
(a) Asian Profit margin = [$92,000 × (1 ? 0.18)]/$460,000 = 16.4%.
European Profit margin = [$90,000 × (1 ? 0.18)]/$900,000 = 8.2%.
(b) Asian Asset turnover = $460,000/$368,000 = 1.25.
European Asset turnover = $900,000/$750,000 = 1.20.
(c) Asian ROI = [$92,000 × (1 ? 0.18)]/$368,000 = 20.5%.
European ROI = [$90,000 × (1 ? 0.18]/$750,000 = 9.8%.
(d) Asian Residual income = [$92,000 × (1 ? 0.18)] ? (0.14 × $368,000) = $23,920.
European Residual income = [$90,000 × (1 ? 0.18)] ? (0.14 × $750,000) = $(31,200).
(e) Asian EVA = [$92,000 × (1 ? 0.18)] ? [0.14 × ($368,000 ? 0)] = $23,920.
European EVA = [$90,000 × (1 ? 0.18)] ? [0.14 × ($750,000 ? 0)] = $(31,200).
(2)
The Asian Division has exceeded the target ROI, has a positive residual income and a higher EVA. Using these single point estimates, Asian Division appears to be the better division.
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