ASISTENSI AM (AFTER-MID)

PERTEMUAN KE-8 (Tanggal 13 April 2017)

Chapter 23 Performance Measurement
Muhammad Sholkhi Ardiansyah

Problem 1
Nanoman Abstract Company has three divisions that operate autonomously. Their results for
2015 are as follows:

Riddler Joker Penguin

Sales $5,000,000 $7,000,000 $10,000,000
Contribution margin 1,440,000 1,700,000 3,500,000
Operating income 1,000,000 1,750,000 2,520,000
Investment base 9,000,000 10,000,000 14,000,000

The company's desired rate of return is 20%.

Required:
a. Compute each division's ROI.
b. Compute each division's residual income.
c. Rank each division by both ROI and residual income.
d. Which division had the best performance in 2015? Why?

Problem 2
Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two
sources of funds: long term debt with a market and book value of $32 million issued at an
interest rate of 10%, and equity capital that has a market value of $18 million (book value of
$8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%.
Coptermagic has profit centers in four divisions that operate autonomously. The company's
results for 2015 are as follows:

Operating Current
Income Assets Liabilities
New York $1,750,000 $11,500,000 $2,500,000
Chicago 2,400,000 9,000,000 3,500,000
Dallas 4,675,000 27,500,000 9,500,000
Los Angeles 4,200,000 25,000,000 8,000,000

Required:
a. Compute Coptermagic's weighted average cost of capital.
b. Compute each division's Economic Value Added.
c. Rank the divisions by EVA.
Problem 3
Reddish Co. is a company that produces medium-sized equipment. Currently the company
has opportunity to invest in two new projects, Pumping Machine project and Speed-burner
project. Currently, the company has average total assets of $58 million and operating income
of $7 million. The details of the new projects are as follow:

Pumping Machine Speed-burner

Initial investment $1.500.000 $ 1.380.000
Operating income $140.000 $180.000
The company may borrow up to $2 million for further investment. The effective tax rate is
25% and required rate of return is 12.07%
Required:
1. Calculate the return on investment for each project using operating income and initial
investment as measurements. Which projects will be taken?
2. Calculate residual income for each project. Which projects will be taken?
3. If the company decided to borrow $2 million with interest rate 10% and use equity
capital with the cost 15% to finance the two projects, calculate the EVA for each
project. Which projects will be taken?

Homework

JOJO Company produces a wide variety of outdoor sports equipment. Its newest division,
Golf Technology, manufactures and sells a single product AccuDriver, a gold club that uses
global positioning satellite technology to improve the accuracy of golers shots. The demand
for AccuDriver is relatively insensitive to price changes. The following data are available for
Golf Technology, which is an investment center for Outdoor Sports:

Annual Fixed Cost : $30.000.000

Variable cost per AccuDriver : $500

Number of AccuDrivers sold each year : 150.000

Average operating assets invested in the division : $48.000.000

Required :

1. Compute Golf Technologys ROI if the selling price of AccuDrivers is $720 per club
2. If management requires an ROI of at least 25% from the division, what is the minimum
selling price that the Golf Technology Division should charge per AccuDriver club?
3. Assume that Outdoor Sports judges the performance of its investment centers on the basis
of RI rather than ROI, what is the minimum selling price that Golf Technology should
charge per AccuDriver if the companys required rate of return is 20%?