The home appliances division of Benjamin Industries Ltd. now shows a profit of 5 per cent on
Question:
The home appliances division of Benjamin Industries Ltd. now shows a profit of 5 per cent on sales of ₹12 lakh. An investment of ₹4,00,000 is needed to finance these sales. The management of the firm in considering the following two alternative plans for improving operations submitted by two employees, E1 and E2:
(a) E1 believes that the sales volume can be doubled by greater promotional effort. It would lower the profit rate to 4 per cent of sales and require an additional investment of ₹1,00,000.
(b) E2 favours eliminating some unprofitable appliances and improving efficiency by adding ₹2,00,000 in capital equipment. This alternative would decrease sales volume by 10 per cent but improve the profit rate to 7 per cent of sales. You are required to determine:
(a) The company’s current rate of return on investment in the division,
(b) The anticipated rates of return under the alternatives suggested by E1 and E2, and
(c) Which plan, if any, will you recommend?
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