Chapter 3, Problem 29P

The Global Products Corporation has three subsidiaries.

a. Which division has the lowest return on sales?

b. Which division has the highest return on assets?

c. Compute the return on assets for the entire corporation.

d. If the $\text{\$8,760,000}$ investment in the heavy machinery division is sold off and redeployed in the medical supplies subsidiary at the same rate of return on assets currently achieved in the medical supplies division, what will be the new return on assets for the entire corporation?

Summary Introduction

To calculate: The division with the lowest return on sales.

Introduction:

Return on sales:

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is calculated by dividing the net income by sales.

Answer to Problem 29P

The medical supply division is the one with the lowest return on sales, that is, 8.48%. Whereas, the return on sales of heavy machinery division is 9.90% and that of electronics is 8.50%.

Explanation of Solution

Calculation of the return on sales of medical supplies:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$1,700,000}{\$20,040,000}\\ =8.48\%\end{array}$

Calculation of the return on sales of heavy machinery:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$592,000}{\$5,980,000}\\ =9.90\%\end{array}$

Calculation of the return on sales of electronics:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$402,000}{\$4,730,000}\\ =8.50\%\end{array}$

Summary Introduction

To determine: The division with the highest ROA.

Introduction:

Return on assets (ROA):

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is computed by dividing the net income of a company by its sales.

Answer to Problem 29P

The medical supply division is the one with the highest ROA, that is, 20.38%. Whereas, the ROA of heavy machinery division is 6.76% and that of electronics is 11.26%.

Explanation of Solution

The calculation of the ROA of medical supplies:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total Assets}}\\ =\frac{\$1,700,000}{\$8,340,000}\\ =20.38\%\end{array}$

The calculation of the ROA of heavy machinery:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total Assets}}\\ =\frac{\$592,000}{\$8,760,000}\\ =6.76\%\end{array}$

The calculation of the ROA of electronics:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total Assets}}\\ =\frac{\$402,000}{\$3,570,000}\\ =11.26\%\end{array}$

Summary Introduction

To calculate: The ROA for the entire corporation.

Introduction:

Return on assets (ROA):

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is computed by dividing the net income of a company by its sales.

Answer to Problem 29P

The ROA for entire corporation is 13.03%.

Explanation of Solution

Calculation of the ROA for the entire corporation:

$\begin{array}{c}\text{ROA}=\frac{\text{Corporate Net Income}}{\text{Corporate Total Assets}}\\ =\frac{\$2,694,000}{\$20,670,000}\\ =13.03\%\end{array}$

Working Notes:

Calculation of the corporate net income:

$\begin{array}{c}\text{Corporate Net Income}={\text{Net Income}}_{\text{Medical Supplies}}+{\text{Net Income}}_{\text{Heavy Machinery}}+\\ {\text{Net Income}}_{\text{Electronics}}\\ =\$1,700,000+\$592,000+\$402,000\\ =\$2,694,000\end{array}$

Calculation of the corporate total assets:

$\begin{array}{c}\text{Corporate Total Assets}={\text{Total Assets}}_{\text{Medical Supplies}}+{\text{Total Assets}}_{\text{Heavy Machinery}}+\\ {\text{Total Assets}}_{\text{Electronics}}\\ =\$8,340,000+\$8,760,000+\$3,570,000\\ =\$20,670,000\end{array}$

Summary Introduction

To calculate: For the whole corporation, the new ROA.

Introduction:

Return on assets (ROA):

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is computed by dividing the net income of a company by its sales.

Answer to Problem 29P

The new return on assets for the corporation as a whole is 18.81%.

Explanation of Solution

Calculation of new return on assets for the entire corporation:

$\begin{array}{c}\text{Return on assets}=\frac{\text{Corporate Net Income}}{\text{Corporate Total Assets}}\\ =\frac{\$3,887,288}{\$20,670,000}\\ =18.81\%\end{array}$

Working Notes:

Calculation of the return on redeployed assets of heavy machinery:

$\begin{array}{c}\text{Return on redeployed assets in heavy machinery}=20.38\%\times \$8,760,000\\ =\$1,785,288\end{array}$

Calculation of the corporate net income:

$\begin{array}{c}\text{Corporate Net Income}={\text{Net Income}}_{\text{Medical Supplies}}+{\text{Net Income}}_{\text{Heavy Machinery}}+\\ {\text{Net Income}}_{\text{Electronics}}\\ =\$1,700,000+\$1,785,288+\$402,000\\ =\$3,887,288\end{array}$

Calculation of the corporate total assets:

$\begin{array}{c}\text{Corporate Total Assets}={\text{Total Assets}}_{\text{Medical Supplies}}+{\text{Total Assets}}_{\text{Heavy Machinery}}+\\ {\text{Total Assets}}_{\text{Electronics}}\\ =\$8,340,000+\$8,760,000+\$3,570,000\\ =\$20,670,000\end{array}$