Question

Hoosier Industries manufactures a variety of household products. Roy Washburn, head of the company’s Hardware Division, has just completed a miserable nine months. “If it could have gone wrong, it did. Sales are down, income is down, inventories are bloated, and quite frankly, I’m beginning to worry about my job,” he moaned. Washburn is evaluated on the basis of ROI. Selected figures for the Hardware Division for the past nine months follow.
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 year’s 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 division’s 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.


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  • CreatedApril 22, 2014
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