Part 1: ROI and Residual Income
Teresa Company is an investment center and an operating segment of Irish International Corporation. Teresa Company is currently earning an ROI of 15% on average operating assets of $12,000,000 as of January 1, 2014. On January 1, 2014the company has the opportunity to make an investment which will cost $4,000,000 and which they believe will yield a 12% return (ROI). Irish International Corporation expects its investment centers to earn at least 10% on all new investments.
REQUIRED:
1. Calculate the operating income Teresa Company is currently earning.
2. Calculate the operating income the investment is expected to earn.
3. Calculate the average operating assets Teresa Company will have at year end if they make the investment.
4. Calculate the operating income Teresa Company will have if they make the investment.
5. What will Teresa Company's ROI be if they make the investment?
6. If the CEO of Teresa Company is evaluated based on ROI will Teresa Company make the investment?
7. Calculate the Residual Income for Teresa Company before making the investment.
8. Calculate the Residual Income for Teresa Company assuming that they make the investment.
9. If the CEO of Teresa Company is evaluated based on Residual Income will Teresa Company make the investment?
Part 2: Elimination of a Segment
Mike Company has three products, each are operated as separate segments. Mike Company allocates all of its corporate fixed costs to each of its operating segments. Mike Company's CEO, after looking at this past quarter's results has indicated that something needs to be done. He believes that PRODUCT A is losing money and has solicited your help in evaluating several options. Below are the results of the past quarter for each of the product segments and the Company Total.
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Product A
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Product B
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Product C
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Total
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Sales
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$900,000
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$875,000
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$680,000
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$2,455,000
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- Variable Costs
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$750,000
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$600,000
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$390,000
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$1,740,000
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Contribution Margin
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$150,000
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$275,000
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$290,000
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$715,000
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Segment Fixed Costs
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$140,000
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$130,000
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$120,000
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$390,000
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Allocated Corporate Fixed Costs
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$80,000
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$80,000
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$80,000
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$240,000
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Pre-tax Profit
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($70,000)
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$65,000
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$90,000
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$85,000
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REQUIRED: Determine the Company Total under each of the below, mutually exclusive options:
- Eliminate Product A
- Eliminate Product B
- Eliminate Product C
- Eliminate Product A and Use that capacity to increase Product B Sales by 50%
- Eliminate Product A and Use that capacity to increase Product B Sales by 30% and Product C Sales by 20%.
- Given the options in questions 1-5, which provides the company with the highest total profit?
Part 3: Outsourcing Problem
Bobcat Scanner Company manufactures a high-speed professional scanner. Their target customers are entrepreneurs with a small business who need the ability to easily scan their invoices and receipts. Their products are also popular with individuals who typically use the scanners for keeping personal financial information for tax purposes. In 2013 the company had sales of $106,000,000 with an average contribution margin ratio of 75%. The company runs its own customer call support center in Albany, New York. The company has been concerned that the costs of the support center are too high and have begun looking into the possibility of moving the customer service center to Austin, Texas or to Bangalore, India. The current cost center employs 200 individuals who earn (inclusive of wages and benefits) $25 per hour and work on average 167 hours per month. The company leases a phone system for $100,000 per month and leases office space for $10,000 per month. Annual training costs amount to $300 per employee.
If the call center moves to Austin, Texas they will employ 200 individuals and pay (inclusive of wages and benefits) $22 per hour. The cost to lease a phone system would be $110,000 per month and the cost to lease office space would be $7,500 per month. The company training costs would cost $300 per employee. The company would like its current call center employees to be willing to move, however, they recognize that for many employees this will not be possible. The company estimates that half of its employees will decide not to move with the call center. For those employees who choose not to move the company will pay a severance equal to one month's wages.
If the call center moves to Bangalore, India they will employee 350 individuals and pay (inclusive of wages and benefits) $7 per hour. The cost to lease a phone system would be $75,000 per month and the cost to lease office space would be $1,500 per month. The company would incur additional travel costs to oversee the operations by approximately $3,000 per month. Annual employee training costs would be $100 per employee. The company believes that if they move the call center to Bangalore their customer service would decrease causing a decrease in annual sales by 5%. In addition, the company would have to pay a severance package to existing employees equal to one month's wages.
REQUIRED:
1. By how much will the company's annual pre-tax income change if they decide to move the call center to Austin, Texas?
2. By how much will the company's annual pre-tax income change if they decide to move the call center to Bangalore, India?
3. What should the company do?
Part 4: Cost Volume Profit
Anne Company has prepared the following planning budget. Using the planning budget, calculate
1. Contribution Margin Ratio
2. Sales Dollars at the Breakeven Point
3. Dollar Margin of Safety (using budget sales)
4. Sales needed to achieve a $50,000 before tax income.
5. Sales needed to achieve a $50,000 after tax income.
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Anne Company Planning Budget For the Month of January
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Planning
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Budget
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Sales
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$225,000
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Less: Variable Costs
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Cost of Goods Sold
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$144,000
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Commissions
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$13,500
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Supplies
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$4,500
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Contibution Margin
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$63,000
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Less: Fixed Costs
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Supplies
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$2,000
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Salaries
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$10,000
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Rent
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$4,000
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Advertising
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$3,000
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Depreciation
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$2,000
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Utilities
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$1,200
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Insurance
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$1,500
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Interest
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$1,400
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Income Before Taxes
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$37,900
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Income Tax Expense (25%)
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$9,475
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Net Income
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$28,425
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Attachment:- Template.rar