Three Bears Inc. produces various components used by many industries in the production of medical equipment. They currently have two divisions – Papa Bear which manufactures components for large scale medical equipment such as MRI and X-ray machines; and Momma Bear which manufactures components for medium-scale medical equipment such as centrifuges and ultrasound machines. They are preparing to open their third division - Baby Bear Division which will produce manufacturing components for small-scale medical equipment such as microscopes and sphygmomanometers.

Three Bears, provided the following income statement for its current divisions: Papa and Momma

 

Segment Margin Income Statement for Three Bears
	Papa	Momma	Total
Revenue	$1,000,000	$620,000	$1,620,000
Variable expenses
Product	520,000	310,000	830,000
Selling and administrative	80,000	50,000	130,000
Contribution margin	400,000	260,000	660,000
Less traceable fixed costs	60,000	20,000	80,000
Segment margin	$340,000	$  240,000	$580,000
Common fixed costs			270,000
Net operating income			$310,000

 

 

Included in traceable fixed costs is $50,000 of depreciation expense for Papa and $28,000 for Momma. The actual weighted-average cost of capital for Three Bears is 8% however the company’s required rate of return is 12%. Its tax rate is 40%. The Papa division balance sheet on January 1 showed $1,300,000 of assets ($300,000 current and $1,000,000 long-term) and $820,000 of liabilities ($220,000 current and $600,000 long-term). The Momma division reported $800,000 of assets ($100,000 current and $700,000 long-term) and $550,000 of liabilities ($400,000 current and $150,000 long-term). At the end of the year, Papa’s had assets of $1,650,000 ($400,000 current and $1,250,000 long term) and liabilities of $600,000 ($300,000 current and $300,000 long term). Momma’s assets at the end of the year were $780,000 ($110,000 current and $670,000 long term and liabilities of $590,000 ($380,000 current and $210,000 long term). The division manager for Papa has had an average ROI of 25% for the past 4 years and the manager of Momma is only in her second year as manager of the Little Division but last year had an ROI of 32%. In evaluating residual income for the overall division, the company uses average asset for the amount invested.

 

Part A:

For each Division compute:

1. Sales Margin
2. Asset Turnover
3. ROI
4. RI
5. EVA
6. Which division is performing better? Explain.

 

Part B:

Momma is considering investing in new 3-D printing capabilities in order to produce certain parts more efficiently. This equipment will cost $400,000 and is estimated to produce income of $40,000 per year over the 5 -years the equipment will be useful before needing to be replaced. Projected cash flows from the asset are estimated to be $10,000 in year one, $20,000 in years two through four and $12,000 in year 5.  Annual depreciation on the machine is based on straight line depreciation and no residual value. The machine will need to be recalibrated at the end of each year at a cost of $2,000.

1. Should Momma move forward with the investment? (for credit you must show the numerical rationale for your answer).
2. Whether you said Momma should or should not move forward with the investment, what about from the overall company standpoint – should the investment be undertaken?
3. What are four things to consider other than your quantitative analysis in making this type of investment decision?

Answer rating: 100% (QA)

Part A sales margin sales margin gross profitnet sales100 Details papa momma sales 1000000 620000 cost of goods sold variable costs production 520000 ... View the full answer