B10 fx Timber Division 1 Problem 2A: Evaluating Decentralized Operations (17: 15 + 2) B 2 Masters Inc. has reported the following information for its Timber and Furniture Divisions: 4 Sales: 5 Invested assets: Total costs and operating expenses: 7 Minimum rate of return of the whole company: B 9 Required: 10 a) Determine the following for both the Divisions: 11 ) Income from operation: 12 iii) Profit Margin 13 iii) Investment turnover 14 iv) Return on Investment (ROI) using DuPont formula 15 ii) Residual Income 16 17 b) Which division is more efficient in generating revenue and why? 18 19 C D E Timber Division Furniture Division $4,500,000 $2,650,000 $3,200,000 20% 8800000 4200000 6950000 20% Timber Division Furniture Division G H K L M N Relevant formulae: Profit margin = Income from operation/Sales Investment turnover = Sales/Invested assets ROI = Income from operation/Invested assets Dupont ROI formula = Profit margin x Investment tumover Residual income = Operating income - Minimum desired inocme Minimum desired income = Invested assets x minimum rate of return 20 21 Problem 2B: Comparing ROI and RI as an evaluation tool (12: 8 +4) 22 Masters has offered a new investment project to the Timber Division. 23 The following information is provided about the new project: 24 Invested assest: 25 Expected Income from operation: 26 Therefore, the return on investment: 27 28 Required: $1,500,000 $380,000 25.33% 29 a) Calculate the following, If the manager of Timber Division accepts the new project: 30 ) *Total Operating income 31 II) *Total Invested assets 32 iii) The total ROI: (Total Income from Operation/Total Invested Assets) 33 iv) The total residual income of the Lumber Division 34 *Total = Lumber division + New investment 35 36 b) Should Masters use ROI or RI as their performance evaluation tool to reward the manager while ensuring the overall profitability of the company? 37 Explain your answer in the text box below by referring to the calculations for Timber Division in Problem 2A and 2B. 39 Explanation: 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 RA2