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$160,000 in corporate costs are allocated to the divisions based on division sales. In addition, there are $210,000 in corporate costs which cannot...
$160,000 in corporate costs are allocated to the divisions based on division sales. In addition, there are $210,000 in corporate costs which cannot reasonably be allocated to the divisions.
Company has the following data for this year:
Soft Drinks Div.Cider Div.Coffee Div.
Sales500,0001,300,000800,000
# of units sold250,000430,000160,000
Contribution margin260,000475,000460,000
Direct fixed costs59,520377,620231,900
Avg net operating assets320,000800,000420,000
Weighted avg cost of capital17%17%17%
Company has a target annual rate of return of 20 percent, and is subject to a 30% tax rate. The Soft Drinks Division was recently presented with an investment in a $105,000 piece of machinery that would save operating costs of $5,000 per year over a period of thirty years. The new machinery would replace a current piece of equipment that could be sold for $2,000 and has a book value of $50,000. The manager of the Soft Drinks Division decided against replacing the current equipment.
The CEO of Company heard about the investment opportunity and is confused about the outcome. From his initial conversations with the Soft Drinks Division's manager, it sounded like a good investment.
Copperfield is also reconsidering its investment in cider-based drinks - in the three previous years, Cider has shown a net loss. When Copperfield launched the Cider product line four years ago, he gave the division manager until this year to come 'out of the red'. 80% of the Cider division's direct fixed costs could be avoided by discontinuing the product line. At this point, Willowbrook has not identified an alternate use for the Cider production space, and all three divisions are currently running at 80% of practical capacity.
1.Show multilevel income statement for three divisions and corporate net income.
2. Calculate the ROI, residual income, and EVA for the new investment considered by the Soft Drinks Division.
3. Provide a differential analysis of lifetime costs of the Soft Drinks Division's investment.
5. Recreate the multilevel income statement from requirement (1) showing the overall effect on net income if Company were to discontinue the Cider product line. Provide a recommendation on whether to discontinue the Cider product line.
