Mei is trying to better understand the companys profits and where they come from. She used to
Question:
Mei is trying to better understand the company’s profits and where they come from. She used to calculate only return on investment (ROI) and residual income (RI) for the company as a whole.
Based on the information she has from last year, she calculated an ROI of 13.3% and a RI of $200,000 for the waterpark.
Mei would like you to drill down into these numbers further. The details of the information from the last year are:
Division Operating Income Average Assets
Slides $800,000 $7,500,000
Food $200,000 $450,000
Merchandise $700,000 $2,550,000
Accommodation $300,000 $4,500,000
She used 12% as her required rate of return but there is a lot of volatility in the market so rates are
fluctuating up and down by 2%. She would like to know how the results would look under ROI and RI if her required rate of return were to change. In addition, both the managers of the Slides and the Accommodation divisions feel their numbers may be unfavorable. The both argue that without slides and a place to stay, no one would buy food or merchandise, and therefore they should be judged by different rates of return. As you complete the quantitative analysis, consider what you might suggest to Mei and the division managers with regards to their relative performance.
Show all calculations on excel.
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins