Hoosier Industries manufactures a variety of household products. Roy Washburn, head of the companys Hardware Division, has
Question:
Sales................................................................................. $7,200,000
Operating income............................................................. 540,000
Invested capital................................................................ 9,000,000
In an effort to make something out of nothing and to salvage the current years performance, Washburn was contemplating implementation of some or all of the following four strategies:
a. Write off and discard $90,000 of obsolete inventory. The company will take a loss on the disposal.
b. Accelerate the collection of $120,000 of overdue customer accounts receivable.
c. Stop advertising through year-end and drastically reduce outlays for repairs and maintenance. These actions are expected to save the division $225,000 of expenses and will conserve cash resources.
d. Acquire two competitors that are expected to have the following financial characteristics:
Required:
1. Briefly define sales margin, capital turnover, and return on investment and then compute these amounts for the Hardware Division over the past nine months.
2. Evaluate each of the first two strategies listed, with respect to its effect on the divisions last nine months performance, and make a recommendation to Washburn regarding which, if any, to adopt.
3. Are there possible long-term problems associated with strategy (c)? Briefly explain.
4. Determine the ROI of the investment in Anderson Manufacturing and do the same for the investment in Palm Beach Enterprises. Should Washburn reject both acquisitions, acquire one company, or acquire both companies? Assume that sufficient capital is available to fund investments in bothorganizations.
Step by Step Answer:
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-0078025662
10th edition
Authors: Ronald Hilton, David Platt