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    Gray Javier
    The document discusses the calculations and analysis of return on investment (ROI), investment turnover, profit margin, economic value added (EVA), and transfer pricing. It provides the ROI calculations for a business with and without an additional investment in a knitting machine. The ROI is higher with the investment, so the manager approves it. It also calculates the transfer price between two divisions of a company, finding it exceeds the market price so the internal sale will not occur.

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    FA5

    Uploaded by

    Gray Javier
    68 views3 pages
    The document discusses the calculations and analysis of return on investment (ROI), investment turnover, profit margin, economic value added (EVA), and transfer pricing. It provides the ROI calculations for a business with and without an additional investment in a knitting machine. The ROI is higher with the investment, so the manager approves it. It also calculates the transfer price between two divisions of a company, finding it exceeds the market price so the internal sale will not occur.

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    The document discusses the calculations and analysis of return on investment (ROI), investment turnover, profit margin, economic value added (EVA), and transfer pricing. It provides the ROI calculations for a business with and without an additional investment in a knitting machine. The ROI is higher with the investment, so the manager approves it. It also calculates the transfer price between two divisions of a company, finding it exceeds the market price so the internal sale will not occur.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    68 views3 pages

    FA5

    Uploaded by

    Gray Javier
    The document discusses the calculations and analysis of return on investment (ROI), investment turnover, profit margin, economic value added (EVA), and transfer pricing. It provides the ROI calculations for a business with and without an additional investment in a knitting machine. The ROI is higher with the investment, so the manager approves it. It also calculates the transfer price between two divisions of a company, finding it exceeds the market price so the internal sale will not occur.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Glennard M.

    Alcovendas
    BSA-A2C

    Formative Assessment 5

    Answers for Problem #1


    1.  Return of Investment (ROI) = Net Operating Income / Average Operating Assets
    Return of Investment = P310,000 / P3,000,000 = 0.1033 or 10.33%

    2. 
    Investment Turnover = Sales Revenue / Average Operating Assets
    Investment Turnover = P3,450,000 / P3,000,000 = 1.15

    Profit Margin = Net Operating Income / Sales Revenue


    Profit Margin = P310,000 / P3,450,000 = 0.0899 or 8.99%

    Return of Investment (ROI) = Investment Turnover x Profit Margin


    Return of Investment = 1.15 x 0.0899 = 0.1033 or 10.33%

    3. 
    Additional Average Operating Assets = (Beginning Operating Assets + Ending
    Operating Assets) / 2
    Additional Average Operating Assets = P1,000,000 / 2 = P500,000

    ROI = Net Operating Income / Average Operating Assets


    ROI = (P 310,000 + 57,500) / (P 3,000,000 + P 500,000) = 0.1050 or 10.50%
    Based on the computations above, the manager will approve the investment since the
    ROI with the investment is larger than ROI without investment.
    4. 
    Investment Turnover = Sales Revenue / Average Operating Assets
    = (P 3,450,000 + 575,000) / P3,500,000
    Investment Turnover = 1.15

    Profit Margin = Net Operating Income / Sales Revenue


    = P 367,500 / P4,025,000
    Profit Margin = 0.0913 or 9.13%
    The investment turnover is still the same while the profit margin has increased.

    5. 

    EVA (without investment)


    = Net Operating Income - (Actual Cost of Capital x Average Operating Assets)
    = P 310,000 - (0.07 x P 3,000,000)
    EVA (without investment) = P 100,000.00

    EVA (with investment)


    = Net Operating Income - (Actual Cost of Capital x Average Operating Assets)
    = P 367,500 - (0.07 x P3,500,000)
    EVA (with investment) = P 122,500.00

    The manager should decide to make the knitting machine investment because, with the
    investment, the EVA is higher. 
     

    Answers in Problem #2
    1.  If Lorenz can sell all the products to the outside customers at a price of P 75, he will
    gain a larger profit rather than accepting Rosario's request to lower the price to $70.
    Thus, Lorenz should not accept the request of Rosario.

    2.  For 16,000 units, the minimum price is P53 which is the cost of manufacturing the
    product, while the maximum price is P75 which is the market price. In addition, Lorenz
    should consider the price of P70 because the cost of the product is just P53, so he can
    still make profit from it.

    3. 
    Transfer price = Full cost x Mark-up percentage
    = P 63 x 120% 
    Transfer price = P 75.60
    The transfer price will not take place because it is beyond the minimum and maximum
    range. Also, the transfer price is higher than the market price. Thus, Rosario will just
    buy from the market.

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