You Are the Manager of an Operating Division of a Manufacturing

question 10

Essay

You are the manager of an operating division of a manufacturing company.Your division has $4,500,000 in assets,and your budgeted income statement for the current year follows: $$\begin{array} { | l | r | } \hline \text { Revenues } & \$ 8,000,000 \\\hline \text { Cash costs: } & \\\hline \text { Variable } & 1,000,000 \\\hline \text { Fixed } & 3,750,000 \\\hline \text { Depreciation } & 1,375,000 \\\hline\end{array}$$
Your company uses a performance evaluation and bonus plan,which is based on return on investment (ROI)computed with end-of-year gross asset balances.In October,you discover that you can purchase a new machine for $3,250,000,which will enable you to expand the output of your division and save costs.The machine would have a salvage value of $250,000 and would be depreciated over 3-years using the straight-line method.It will increase output by 10% while reducing cash fixed costs by 5%.If you accept the machine,it will be installed in late December,but no depreciation will be taken on the new machine this year.If you do buy this machine,you will have to dispose of the machine you are now using,which you just purchased last January.That machine cost you $2,500,000 but has no salvage value.$750,000 of the depreciation on the income statement is depreciation for this machine.In the ROI calculations,the company includes any gains or losses for equipment disposal in income for the year.You may safely ignore all taxes for this analysis.Required:
a.What is your division's ROI this year if you do not acquire the new machine?
b.What is your division's ROI this year if you do acquire the new machine?
c.What is your division's expected ROI next year if the machine is acquired and meets expectations?

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Definitions:

Legal Capacity

The ability of an individual or entity to enter into legally binding contracts, recognizing that the person has the requisite age and mental capability to understand and agree to the terms.

Mental Ability

Refers to the capacity to perform cognitive tasks, understand complex ideas, learn from experience, apply logic and reason, and adapt to new situations.

Voidable

Voidable refers to a legal term indicating that a contract or agreement is valid and enforceable but can be annulled by one party due to certain circumstances, such as misrepresentation or duress.

Disaffirm

The legal act of denying or rejecting the validity of a contract or agreement, especially by a party who was minor at the time of entering the contract.