Chapter 22: 11QS (page 1015)
Refer to the information in QS 22-10. Assume a target income of 12% of average invested assets. Compute residual income for each division.
Investment center | Residual income |
Cameras and camcorders | $2,100,000 |
Phones and Communications | $0 |
Computers and accessories | ($400,000) |
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For a recent year L’Oréal reported operating profit of €3,385 (in millions) for its cosmetics division. Total assets were €12,888 (in millions) at the beginning of the year and €13,099 (in millions) at the end of the year. Compute return on investment for the year. State your answer as a percent, rounded to one decimal.
What three factors would influence your evaluation as to whether a company’s current ratio is good or bad?
R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs total \(18,000 for the tax season. Use this information to determine the
(1) selling price per composite unit,
(2) variable costs per composite unit,
(3) break-even point in composite units, and
(4) number of units of each product that will be sold at the break-even point.
Types of return | Fee charged | Variable cost per return |
Easy (Form 1040EZ) | \)50 | $30 |
Moderate (Form 1040) | 125 | 75 |
Business | 275 | 100 |
Williams Company began operations in January 2017 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.
| WILLIAMS COMPANY | |||
| Departmental Income Statements | |||
| For Year Ended December 31, 2017 | |||
Particular | Clock | Mirror | Combined |
Sales | \(130,000 | \)55,000 | \(185,000 |
Cost of goods sold | 63,700 | 34,100 | 97,800 |
Gross profit | 66,300 | 20,900 | 87,200 |
Direct expenses | |||
Sales salaries | 20,000 | 7,000 | 27,000 |
Advertising | 1,200 | 500 | 1,700 |
Store supplies used | 900 | 400 | 1,300 |
Depreciation – equipment | 1,500 | 300 | 1,800 |
Total direct expenses | 23,600 | 8,200 | 31,800 |
Allocated expenses | |||
Rent expenses | 7,020 | 3,780 | 10,800 |
Utilities expenses | 2,600 | 1,400 | 4,000 |
Share of office department expenses | 10,500 | 4,500 | 15,000 |
Total allocated expenses | 20,120 | 9,680 | 29,800 |
Total expenses | 43,720 | 17,880 | 61,600 |
Net income | 22,580 | 3,020 | 25,600 |
Williams plans to open a third department in January 2018 that will sell paintings. Management predicts that the new department will generate \)50,000 in sales with a 55% gross profit margin and will require the following direct expenses: sales salaries, \(8,000; advertising, \)800; store supplies, \(500; and equipment depreciation, \)200. It will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new painting department will fill one-fifth of the space presently used by the clock department and one-fourth used by the mirror department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the painting department to increase total office department expenses by $7,000. Since the painting department will bring new customers into the store, management expects sales in both the clock and mirror departments to increase by 8%. No changes for those departments’ gross profit percents or their direct expenses are expected except for store supplies used, which will increase in proportion to sales.
Required
Prepare departmental income statements that show the company’s predicted results of operations for calendar-year 2018 for the three operating (selling) departments and their combined totals. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)
Question: Review the chapter’s opening feature about Marcela Sapone and Jessica Beck and the business they founded, Hello Alfred. Assume that they are considering expanding the business to Europe and that the current abbreviated income statement appears as follows.
HELLO ALFRED Income Statement For Year Ended December 31, 2017 | |
Sales | \(1,000,000 |
Operating expenses (55%) | 550,000 |
Net income | 450,000 |
Assume also that Hello Alfred currently has no interest-bearing debt. If it expands to Europe, it will require a \)300,000 loan. Hello Alfred has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales in Europe will equal \(250,000 and that all expenses at both locations will continue to equal 55% of sales.
Required
1. Prepare an income statement (showing three separate columns for current operations, European, and total) for the company assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at \)1,000,000.
2. Compute the company’s times interest earned under the expansion assumptions in part 1.
3. Assume sales in Europe are \(400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
4. Assume sales in Europe are \)100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
5. Comment on your results from parts 1 through 4.
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