You are the manager of a franchise operating division of the Kwik-Copies Company. Your company evaluates your division using ROI, computed with end-of-year gross asset balances, and calculates manager bonuses based on the percentage increase in ROI over the prior year. Your division has $9 million in assets. Your budgeted income statement for the fiscal year is as follows:
Sales ................ $16,500,000
Variable expenses .......... 3,000,000
Contribution margin ......... $13,500,000
Fixed expenses ........... 7,750,000
Depreciation expense ........ 2,375,000
Division profit ............ $ 3,375,000
During the year, you consider buying a new copy machine for $4 million, which will enable you to expand the output of your division and reduce operating costs. The copy machine would have no salvage value and would be depreciated over five years using straight-line depreciation. It will increase output by 10 percent while reducing fixed costs by $4 million. If you decide to purchase the copy machine, it will be installed in late December but will not be ready for use until the following year. As a result, no depreciation will be taken on it this year.
If you do buy the copy machine, you will have to dispose of the copy machine you are now using, which you just purchased during the current year. The old copy machine cost you $4 million but has no salvage value. Of the depreciation in the income statement, $1 million is for this machine. In the ROI calculations, the company includes any gains or losses from copy equipment disposal as part of the company’s operating income.

A. What is your division’s ROI this year if you do not acquire the new machine?
B. What is your division’s ROI this year if you do acquire the new copy machine?
C. What is your division’s expected ROI for next year if the copy machine is acquired and meets expectations? Assume that unit costs and prices do not change.
D. As the manager, what action will you take and why?

  • CreatedMarch 11, 2015
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