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Accounting - Exercise 12-14 1. Cornerstone Exercise 12-14 (Algorithmic) Calculating Residual Income Pelican Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold 280,000    Gross margin $251,250 Selling and administrative expense 184,700    Operating income $66,550 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Pelican requires a minimum rate of return of 10 percent. For Pelican, calculate: 1. Average operating assets $   _________________   2. Residual income $   _________________   2. Cornerstone Exercise 12-15 (Algorithmic) Calculating Economic Value Added East Mullett Manufacturing earned net income last year as shown in the following income statement: Total capital employed equaled $389,000. East Mullett's actual cost of capital is 8 percent. Calculate the EVA for East Mullett Manufacturing. If required, round your answer to nearest whole number.$   _________________   3. eBookeBookeBook Exercise 12-23 (Algorithmic) The Home Products Division of Schipper Company had operating income last year of $112,400 and operating assets of $750,000. Schipper's minimum acceptable rate of return is 10 percent. Calculate the residual income for the Home Products Division. Round your answer to the nearest dollar. Residual income = $   _________________   4. eBookeBookeBook SpreadsheetSpreadsheetSpreadsheet Problem 12-34 Return on Investment and Investment Decisions You may use the attached spreadsheet to help you complete this activity, but you are not required to do so. You will find the spreadsheet by clicking on the link in the drop-down menu above. Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert. The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12 percent. If required, round your answers to two decimal places. 1.  Compute the ROI of the following (in percent): a. The division if the radio project is not undertaken.   _________________   % b. The radio project alone.   _________________   % c. The division if the radio project is undertaken.   _________________   % 2.  Compute the residual income of the following: a. The division if the radio project is not undertaken. $     _________________   b. The radio project alone. $     _________________   c. The division if the radio project is undertaken. $     _________________   3.  Conceptual Connection: Do you suppose that Leslie will decide to invest in the new radio? Why or why not? The input in the box below will not be graded, but may be reviewed and considered by your instructor.  _________________   5. eBookeBookeBook Problem 12-36 Return on Investment for Multiple Investments, Residual Income Links to learning objectives referenced by this question can be accessed in the "Additional Resources" drop-down menu above. The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of $28.9 million and expected operating income of $4.335 million. The outlay required for each investment and the expected operating incomes are as follows: 1.  Compute the ROI for each investment project. Round to two decimal places. Air conditioner, ROI   _________________   % Turbocharger, ROI   _________________   % 2.  Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places. a. The air conditioner investment is made.   _________________   % b. The turbocharger investment is made.   _________________   % c. Both investments are made.   _________________   % d. Neither additional investment is made.   _________________   % 3.  Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?  _________________   4.  Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 14 percent. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. $     _________________   b. The turbocharger investment is made. $     _________________   c. Both investments are made. $     _________________   d. Neither additional investment is made. $     _________________   Based on residual income, which investment(s) will the manager make?  _________________   5.  Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10 percent. Calculate the residual income for each of the following four alternatives: a. The air conditioner investment is made. $     _________________   b. The turbocharger investment is made. $     _________________   c. Both investments are made. $     _________________   d. Neither additional investment is made. $     _________________   Based on residual income, which investment(s) will the manager make?  _________________   Why does your answer differ from your answer in Requirement 3? The input in the box below will not be graded, but may be reviewed and considered by your instructor.  _________________   Views (6)
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1. Cornerstone Exercise xxxxxxx (Algorithmic) Calculating xxxxxxx Income Pelican Manufacturing xxxxxxx xxxxxxx income xxxxxxx year as xxxxxxx in the xxxxxxx income xxxxxxx xxxxxxx of goods xxxxxxx 280,000    Gross margin xxxxxxx and administrative xxxxxxx 184,700    Operating income xxxxxxx the beginning xxxxxxx the year, xxxxxxx xxxxxxx of xxxxxxx assets was xxxxxxx At the xxxxxxx of xxxxxxx xxxxxxx the value xxxxxxx operating assets xxxxxxx $460,000. Pelican xxxxxxx a minimum xxxxxxx of return xxxxxxx 10 percent. For xxxxxxx xxxxxxx Average xxxxxxx assets $ xxxxxxx 425,000  2. xxxxxxx income xxxxxxx xxxxxxx 24,050 2. Cornerstone Exercise xxxxxxx (Algorithmic) Calculating xxxxxxx Value Added East xxxxxxx Manufacturing earned xxxxxxx income last xxxxxxx as shown xxxxxxx xxxxxxx following xxxxxxx statement: Total capital xxxxxxx equaled $389,000. xxxxxxx Mullett's xxxxxxx xxxxxxx of capital xxxxxxx 8 percent. Calculate xxxxxxx EVA for xxxxxxx Mullett Manufacturing. xxxxxxx required, round xxxxxxx answer to xxxxxxx xxxxxxx number.$ xxxxxxx 14,240  3. eBookeBookeBook xxxxxxx 12-23 (Algorithmic) xxxxxxx Home xxxxxxx xxxxxxx of Schipper xxxxxxx had operating xxxxxxx last year xxxxxxx $112,400 and xxxxxxx assets of xxxxxxx Schipper's minimum xxxxxxx xxxxxxx of xxxxxxx is 10 xxxxxxx the residual xxxxxxx for xxxxxxx xxxxxxx Products Division. xxxxxxx your answer xxxxxxx the nearest xxxxxxx Residual income xxxxxxx $   xxxxxxx SpreadsheetSpreadsheetSpreadsheet Problem xxxxxxx xxxxxxx on xxxxxxx and Investment xxxxxxx may use xxxxxxx attached xxxxxxx xxxxxxx help you xxxxxxx this activity, xxxxxxx you are xxxxxxx required to xxxxxxx so. You xxxxxxx find the xxxxxxx xxxxxxx clicking xxxxxxx the link xxxxxxx the drop-down xxxxxxx above. xxxxxxx xxxxxxx division manager xxxxxxx Audiotech Inc., xxxxxxx debating the xxxxxxx of a xxxxxxx product—a weather xxxxxxx that would xxxxxxx xxxxxxx a xxxxxxx if the xxxxxxx in which xxxxxxx listener xxxxxxx xxxxxxx under a xxxxxxx thunderstorm or xxxxxxx alert. The budgeted xxxxxxx of the xxxxxxx was $725,000 xxxxxxx operating assets xxxxxxx xxxxxxx The xxxxxxx investment would xxxxxxx income of xxxxxxx and xxxxxxx xxxxxxx an additional xxxxxxx in equipment xxxxxxx $4,000,000. The xxxxxxx required return xxxxxxx investment for xxxxxxx company is xxxxxxx xxxxxxx If xxxxxxx round your xxxxxxx to two xxxxxxx places. 1. xxxxxxx xxxxxxx ROI of xxxxxxx following (in xxxxxxx The division xxxxxxx the radio xxxxxxx is not xxxxxxx   20% b. xxxxxxx xxxxxxx project xxxxxxx   16% c. xxxxxxx division if xxxxxxx radio xxxxxxx xxxxxxx undertaken.   xxxxxxx   % 2. xxxxxxx the residual xxxxxxx of the xxxxxxx The division xxxxxxx the radio xxxxxxx xxxxxxx not xxxxxxx $   290,000  xxxxxxx The radio xxxxxxx alone. xxxxxxx xxxxxxx 160,000  c. xxxxxxx division if xxxxxxx radio project xxxxxxx undertaken. $  450,000 3. xxxxxxx Connection: Do xxxxxxx suppose that xxxxxxx xxxxxxx decide xxxxxxx invest in xxxxxxx new radio? xxxxxxx or xxxxxxx xxxxxxx input in xxxxxxx box below xxxxxxx not be xxxxxxx but may xxxxxxx reviewed and xxxxxxx by your xxxxxxx xxxxxxx will xxxxxxx to invest xxxxxxx the new xxxxxxx since xxxxxxx xxxxxxx is positive xxxxxxx thus increases xxxxxxx overall ROI xxxxxxx the project. 5. eBookeBookeBook xxxxxxx 12-36 Return xxxxxxx Investment for xxxxxxx xxxxxxx Residual xxxxxxx to learning xxxxxxx referenced by xxxxxxx question xxxxxxx xxxxxxx accessed in xxxxxxx "Additional Resources" xxxxxxx menu above. The xxxxxxx of a xxxxxxx that produces xxxxxxx products for xxxxxxx xxxxxxx industry xxxxxxx just been xxxxxxx the opportunity xxxxxxx invest xxxxxxx xxxxxxx independent projects. xxxxxxx first is xxxxxxx air conditioner xxxxxxx the back xxxxxxx of vans xxxxxxx minivans. The xxxxxxx xxxxxxx a xxxxxxx Without the xxxxxxx the division xxxxxxx have xxxxxxx xxxxxxx for the xxxxxxx year of xxxxxxx million and xxxxxxx operating income xxxxxxx $4.335 million. xxxxxxx outlay required xxxxxxx xxxxxxx investment xxxxxxx the expected xxxxxxx incomes are xxxxxxx follows: xxxxxxx xxxxxxx the ROI xxxxxxx each investment xxxxxxx Round to xxxxxxx decimal places. Air xxxxxxx ROI   xxxxxxx ROI   xxxxxxx xxxxxxx  Compute xxxxxxx budgeted divisional xxxxxxx for each xxxxxxx the xxxxxxx xxxxxxx alternatives. Round xxxxxxx two decimal xxxxxxx The air xxxxxxx investment is xxxxxxx   14.92 xxxxxxx The turbocharger xxxxxxx xxxxxxx made. xxxxxxx Both investments xxxxxxx made.   xxxxxxx Neither xxxxxxx xxxxxxx is made. xxxxxxx 15% 3.  Conceptual xxxxxxx Assuming that xxxxxxx managers are xxxxxxx and rewarded xxxxxxx the basis xxxxxxx xxxxxxx performance, xxxxxxx alternative do xxxxxxx think the xxxxxxx manager xxxxxxx xxxxxxx manager will xxxxxxx choose turbocharger xxxxxxx or will xxxxxxx make any xxxxxxx investment since xxxxxxx ROI is xxxxxxx xxxxxxx both xxxxxxx cases. 4.  Conceptual xxxxxxx Suppose that xxxxxxx company xxxxxxx xxxxxxx minimum required xxxxxxx of return xxxxxxx to 14 xxxxxxx Calculate the xxxxxxx income for xxxxxxx of the xxxxxxx xxxxxxx alternatives: a. xxxxxxx air conditioner xxxxxxx is made. xxxxxxx   xxxxxxx xxxxxxx b. The xxxxxxx investment is xxxxxxx $     xxxxxxx c. Both xxxxxxx are made. xxxxxxx   280,480  xxxxxxx xxxxxxx additional xxxxxxx is made. xxxxxxx   289,000  xxxxxxx on xxxxxxx xxxxxxx which investment(s) xxxxxxx the manager xxxxxxx manager will xxxxxxx investment in xxxxxxx as that xxxxxxx him the xxxxxxx xxxxxxx Income. 5. xxxxxxx Connection: Suppose xxxxxxx the company xxxxxxx a xxxxxxx xxxxxxx rate of xxxxxxx equal to xxxxxxx percent. Calculate xxxxxxx residual income xxxxxxx each of xxxxxxx following four xxxxxxx xxxxxxx air xxxxxxx investment is xxxxxxx $    1,460,000 b. xxxxxxx turbocharger xxxxxxx xxxxxxx made. $   xxxxxxx 1,473,080 c. Both xxxxxxx are made. xxxxxxx  1,488,080  d. xxxxxxx additional investment xxxxxxx made. $   xxxxxxx xxxxxxx residual xxxxxxx which investment(s) xxxxxxx the manager xxxxxxx The xxxxxxx xxxxxxx invest in xxxxxxx Turbocharger and xxxxxxx conditioner since xxxxxxx of them xxxxxxx positive Residual xxxxxxx and increase xxxxxxx xxxxxxx Income xxxxxxx the entire xxxxxxx does your xxxxxxx differ xxxxxxx xxxxxxx answer in xxxxxxx 3? The xxxxxxx in the xxxxxxx below will xxxxxxx be graded, xxxxxxx may be xxxxxxx xxxxxxx considered xxxxxxx your instructor.The xxxxxxx differs in xxxxxxx two xxxxxxx xxxxxxx the minimum xxxxxxx of return xxxxxxx in the xxxxxxx alternative (10%) xxxxxxx lower than xxxxxxx alternative (14%). xxxxxxx xxxxxxx investment xxxxxxx Air conditioner xxxxxxx the second xxxxxxx (10%) xxxxxxx xxxxxxx positive Residual xxxxxxx as compared xxxxxxx the negative xxxxxxx Income in xxxxxxx first alternative xxxxxxx Thus, the xxxxxxx xxxxxxx income xxxxxxx the Second xxxxxxx is more xxxxxxx the xxxxxxx xxxxxxx due to xxxxxxx low minimum xxxxxxx rate of xxxxxxx on capital.
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