Reference no: EM131696386

Question - Yard Products Company

Below is an income statement for the most recently ended year for the Yard Products Company and its two divisions:

                                                       Shovel                 Hoe               Co. Total

Sales.............................................  $900,000           $600,000         $1,500,000

Variable Costs.................................   (500,000)          (350,000)            (850,000)

Contribution Margin..........................     400,000           250,000              650,000

Segment Fixed Costs.........................    (250,000)         (100,000)            (350,000)

Corporate Fixed Costs........................   (120,000)         ( 80,000)             (200,000)

Net Income.....................................      30,000             70,000                100,000

Segment average assets.......................     $500,000         $400,000            $900,000

Corporate average assets.....................       300,000           200,000              500,000

Total average assets..................                 800,000           600,000            1,400,000

The president of the company has severely criticized the manager of the Shovel Division for its dismal 3.8% ROI, "which doesn't come close to the firm's 12% cost of capital."  The manager of Hoe Division also was criticized for an 11.7% ROI, "which is slightly less than the cost of capital."  Corporate fixed costs and assets are allocated to each division on the basis of sales.

Required:

a. Show the calculations that the president used as the basis for the criticism.

b. For each division and for the company as a whole, using appropriate data, calculate the following:

a. Return on Sales

b. Investment Turnover

c. ROI

c. Calculate residual income for each division.

d. In view of your answers to parts (b) and (c), is the president's criticism justified?