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Category > Accounting Posted 21 Apr 2017 My Price 100.00

Morton Industrial produces stamping machinery for manufacturers. In 2009, the company expanded vertically by acquiring a supplier, Lancaster Company. Lancaster is now operated as a divisional investment center. Morton monitors its divisions on th

42.     LO.4 (ROI; RI) Morton Industrial produces stamping machinery for manufacturers. In 2009, the company expanded vertically by acquiring a supplier, Lancaster Company. Lancaster is now operated as a divisional investment center.

Morton monitors its divisions on the basis of both unit contribution and return on investment (ROI), with investment defined as average operating assets employed. Management bonuses are determined based on ROI. All investments in operating assets are expected to earn a minimum return of 10 percent before income taxes.

Lancaster’s cost of goods sold is entirely variable, whereas the division’s administra- tive expenses are totally fixed. Selling expenses are a mixed cost with 40 percent at- tributed to sales volume. Last year, Lancaster’s ROI was 13.6 percent. During the fiscal year ended November 30, 2010, Lancaster contemplated a capital acquisition with an estimated ROI of 11.5 percent; however, division management decided that the invest- ment would decrease Lancaster’s overall ROI.

The division’s operating assets employed were $15,750,000 at November 30, 2010, a 5 percent increase over the 2009 year-end balance. The division’s 2010 income state- ment follows.

 

LANCASTER DIVISION

Income Statement

For the Year Ended November 30, 2010 ($000 omitted)

 

Sales revenue

 

$ 25,000

 

Less expenses

 

 

 

Cost of goods sold

$16,500

 

 

Administrative  expenses

3,955

 

 

Selling expenses

    2,700

  (23,155)

 

Income from operations before income taxes

 

$  1,845

 

 

a.     Calculate the segment margin for the Lancaster Division, assuming that 1,484,000 units were produced and sold during the year ended November 30, 2010.

b.    Calculate the following performance measures for 2010 for the Lancaster Division:

1.    pre-tax ROI, and

2.    residual income calculated on the basis of average operating assets employed.

c.     Explain why the management of the Lancaster Division would have been more likely to accept the contemplated capital acquisition if residual income rather than ROI were used as a performance measure.

d.    Identify several items that Lancaster should control if it is to be evaluated fairly by either the ROI or residual income performance measures.

 

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SmartExpert
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Status NEW Posted 21 Apr 2017 06:04 AM My Price 100.00

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file 1492756557-Morton Industrial produces.xlsx preview (560 words )
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