Accounting Business Reporting for Decision Making

594 Accounting: Business Reporting for Decision Making

SOLUTION TO 14.2

Roads and

infrastructure Buildings Total

$ 000 $ 000 $ 000

Sales

Variable costs

8 500

3 500

5 000

2 500

13 500

6 000

Contribution margin

Fixed cost

5 000

3 000

2 500

1 750

7 500

4 750

Divisional margin

Common costsa

Corporate costsb

2 000

600

510

750

555

300

2 750

1 155

810

Profit 890 (105) 785

a$1 155 000/(20 000 + 18 500 employees) = $30 per employee.

b$810 000/(8 500 000 + 5 000 000) = 0.06 per sales dollar or 6 per cent.

14.3 The information below relates to Highland Incorporated.

Division A Division B

Total assets $2 000 000 $10 000 000

Current liabilities 500 000 3 000 000

Divisional profit margin 400 000 1 500 000

Sales 1 900 000 13 000 000

Required

a. Calculate the Du Pont ROI for each division.

b. If the charge for capital is 17 per cent, what is the RI for each division?

c. If the weighted average cost of capital for both divisions is 13 per cent, calculate the EVA. The

tax rate is 30 per cent.

SOLUTION TO 14.3

a. ROI = Profit margin × Investment turnover

Profit/Investment = Profit/Sales × Sales/Investment

Division A

400 000/2 000 000 = 400 000/1 900 000 × 1 900 000/2 000 000

20% = 21% × 0.95 times

Division B

1 500 000/10 000 000 = 1 500 000/13 000 000 × 13 000 000/10 000 000

15% = 11.5% × 1.3 times

b. Profit − Required rate of return × Investment = RI

Division A $ 400 000 − 0.17 × $2 000 000 = $ 60 000

Division B $1 500 000 − 0.17 × $10 000 000 = −$200 000

c. PAT

−WACC × (Total assets − Current liabilities)= EVA

Division A 400 000 × (1 − 0.3) − 0.13 × (2 000 000 − 500 000) = $ 85 000

Division B 1 500 000 × (1 − 0.3)− 0.13 × (10 000 000 − 3 000 000) =−$140 000