Handel Company -
Handel Company is reviewing their operational performance. Below is data pertaining to their financials:
2014 2015 2016
Handel Company Net Income $20.0 $22.6 $23.4
Handel Company Net investment = (Assets-Liabilities) $90.0 $85.0 $80.0
Handel Company Total Assets 100.0 105.0 110.0
Handel calculates ROI using net investment to performance measurement for ROI and Residual Income rather than using Total Assets. Their cost of capital is 10%. All liabilities are from a debt transaction to acquire and run the subsidiary.
a) Calculate ROI for Handel Company using their present methodology.
b) Calculate ROI for Handel Company using Total Assets.
c) Calculate Residual Income
d) Comment on the subsidiary's performance based on your calculations.
Towers Corporation -
Towers Corporation is getting ready for their annual budgeting process. They are budgeting to sell 10,000 shelving units at $8 each. They make their product at a cost of $3.50/unit. Management receives a salary of $7,500 and a bonus of 10% of revenues if the company does well. Sales personnel receive a salary of $2,000 and a commission of $1.25 for each unit sold. Rent is $1,000 per month; utilities $80/month; and other expenses are budgeted at $1,500/year.
Actual results are: Cost of Goods Sold ($35,000), Management ($7,500), Sales personnel ($9,500), Rent ($16,000), Utilities ($850), and Other Expenses ($1,500).
a) Prepare a static budget.
b) Prepare a flexible budget.
c) Comment on the performance of the division based upon the differences in the two budgeting methods.