Calculate return on invested capital, Financial Accounting

Five years ago Ramon Millan quit his job as an associate at a large law firm and opened a burger joint in Malibu. His innovative use of aged blue cheeses and specialty sauces resulted in soaring popularity. He has since opened numerous stores around Los Angeles. While most of his stores are franchised, some are still company owned. Company stores are operated by managers, and those managers are evaluated on return on invested capital (ROIC), which equals profits divided by invested capital. A higher ROIC is viewed as better performance and is compensated accordingly. For purposes of this question, assume that tax rates are zero.

Two of the company units, Delbasso and Habermehl, are considering expanding their menus to include specialty pizzas. Purchase and installation of the necessary equipment costs $180,000 per store and adding pizza should increase profits by $30,600 for each store. The current investment in Delbasso, which is managed by Serena Delbasso, totals $890,000. Delbasso's revenues are $1,100,500 and expenses are $924,420. Investment in the Habermehl store, which is managed by Deidre Habermehl, stands currently at $1,740,000. Habermehl's revenues are $1,760,800 and expenses are $1,496,680. Answer the following questions.

(a)    Calculate ROIC for Delbasso for the two cases where the pizza investment is not made and where the pizza investment is made. Would Serena Delbasso seek to expand her menu to include pizza?

(b)   Calculate ROIC for Habermehl for the same two scenarios in part a). Would Deidre Habermehl seek to expand her menu to include pizza?

(c)    Would your answers to a) and b) change if the two stores were franchised? Whereas company stores are evaluated based on ROIC, assume that franchised stores are evaluated based on economic income. Assume also that the cost of capital is 14%.

(d)   Do you have any advice for Ramon Millan regarding the metric he uses to evaluate managers of company-owned stores?

Posted Date: 2/28/2013 12:21:02 AM | Location : United States







Related Discussions:- Calculate return on invested capital, Assignment Help, Ask Question on Calculate return on invested capital, Get Answer, Expert's Help, Calculate return on invested capital Discussions

Write discussion on Calculate return on invested capital
Your posts are moderated
Related Questions
Receiver appointed by court If appointed by the court, the receiver must give security as directed by the court. The following notification must be given: (a) The debenture h

How do I compute the selling price of a callable bond? I have the bond selling price if it isn''t callable, but I don''t know how the callable feature impacts the price.

Notice an Rs.50, 000 investment in a one year fixed deposit and rolled over yearly for the subsequently two years.  The interest rate for the primary year is 5 percent  yearly and

Question: A proprietary life company issues only non-profit guaranteed growth bonds. The company invests only in equities with an expected return of 10% p.a, the risk free rate

Process of ABC Analysis • Classification:   On the origin of expected use, the items of inventory are categorized according to their categories and per unit Price of each item

Definition: A partnership is defined as “the relationship that subsists between two or more persons carrying on a business in common with a view to making a profit.” (Partnersh

Nature of a Deeds of Arrangement To avoid the expense and delay involved in a bankruptcy, a debtor in trouble may make a private arrangement with the creditors to accept paymen

To decide in what zone should be placed a store which sells video-cassettes, the manager of a firm which sells and rents cassettes makes a study to estimate the demand for each sto

Inter Company balances One of the companies may appear as receivable (debtor) or payable (creditor) in the other company’s books. Just like in accounting four branches, such in

Q. Explain the Matching Principle? Matching Principle - A basic concept of basic accounting. In any one given accounting period, you must try to match the revenue you are repor