Key information for the Peoria Division (PD) of Barrington Industries for 2022 follows: Revenues R15 000 000
Question:
Key information for the Peoria Division (PD) of Barrington Industries for 2022 follows:
Revenues R15 000 000
Operating income R1 800 000
Total assets R10 000 000
PD’s managers are evaluated and rewarded on the basis of ROI defined as operating income divided by total assets. Barrington Industries expects its divisions to increase ROI each year.
Next year, 2023, appears to be a difficult year for PD. PD had planned a new investment to improve quality but, in view of poor economic conditions, has postponed the investment. ROI for 2023 was certain to decrease if PD had made the investment.
Management is now considering ways to meets its target ROI of 20% for next year. It anticipates revenues to be steady at R15 000 000 in 2023.
Required:
2.1 Calculate PD’s return on sales and ROI for 2022.
2.2
a. By how much would PD need to cut costs in 2023 to achieve a target ROI of 20%, assuming no change in total assets between 2022 and 2023?
b. By how much would PD need to decrease total assets in 2023 to achieve its target ROI of 20%, assuming no change in operating income between 2022 and 2023?
2.3 Calculate PD’s RI in 2022 assuming a required return on investment of 15%.
2.4 PD wants to increase RI by 50% in 2023. Assuming it could cut costs by R45 000 in 2023, by how much would PD need to decrease total assets in 2023?
2.5 Barrington Industries is concerned that the focus on cost cutting, asset sales, and no new investments will have an adverse long-term impact on PD’s customers. Yet, Barrington wants PD to meet its financial goals. What other measurements, if any, do you recommend that Barrington use? Explain briefly.
Cost Accounting A Managerial Emphasis
ISBN: 978-0136126638
13th Edition
Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav