Question: Please answer ASAP and I will be sure to upvote! Wholesalers Inc. has two autonomous divisions, Alberta and Saskatchewan. Financial Information for fiscal year 2020
Please answer ASAP and I will be sure to upvote!
Wholesalers Inc. has two autonomous divisions, Alberta and Saskatchewan. Financial Information for fiscal year 2020 follows:
| ALBERTA | SASKATCHEWAN | ||
| Average operating assets | $4,000,000 | $3,250,000 | |
| Contribution margin | $2,950,000 | $1,800,000 | |
| Fixed expenses | $2,250,000 | $1,442,500 | |
| Income before income taxes | $625,000 | $317,500 | |
| Income tax expense | $125,000 | $63,500 | |
| Income taxes payable | $65,000 | $35,000 | |
| Interest expense | $75,000 | $40,000 | |
| Mortgage payable | $950,000 | $500,000 | |
| Net income | $500,000 | $254,000 | |
| Sales | $4,500,000 | $2,875,000 | |
| Variable expenses | $1,550,000 | $1,075,000 |
REQUIRED:
- Wholesalers uses ROI (return on investment) to evaluate the performance of their division managers. A large bonus is given to the division manager who achieves the highest ROI. Calculate the ROI achieved by the Alberta division and by the Saskatchewan division.
- Both divisions have been offered the opportunity to significantly expand their division. The expansion would require an additional investment of $500,000 of additional operating assets. It is estimated that the expansion would add $125,000 in sales and $60,000 in variable expenses to either division and there would be no change in fixed expenses or interest expense. Income taxes would increase by 8%. Which division would be likely to accept the expansion opportunity? Why? Support your answer with calculations.
- Wholesalers is thinking of a move from ROI to residual income as a measure of management performance. A minimum rate of return of 9% will be used. Calculate the residual income earned in fiscal 2020 by the Alberta and Saskatchewan divisions.
- If residual income is being used to evaluate management performance, would this have changed your answer to the expansion opportunity described in 2. above? Why or why not?
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