Question: The Laser Division of FOX Technologies Inc.
The Laser Division of FOX Technologies Inc. has been experiencing revenue and proï¬t growth during the years 20Y6–20Y8. The divisional income statements are provided below.
Assume that there are no charges from service departments. The vice president of the division, Stacy Harper, is proud of her division’s performance over the last three years. The president of FOX Technologies Inc., Hal Nelson, is discussing the division’s performance with Stacy, as follows:
Stacy: As you can see, we’ve had a successful three years in the Laser Division.
Hal: I’m not too sure.
Stacy: What do you mean? Look at our results. Our operating income has more than tripled, while our proï¬t margins are improving.
Hal: I am looking at your results. However, your income statements fail to include one very important piece of information; namely, the invested assets. You have been investing a great deal of assets into the division. You had $2,000,000 in invested assets in 20Y6, $4,500,000 in 20Y7, and $10,000,000 in 20Y8.
Stacy: You are right. I’ve needed the assets in order to upgrade our technologies and expand our operations. The additional assets are one reason we have been able to grow and improve our proï¬t margins. I don’t see that this is a problem.
Hal: The problem is that we want to maintain a 30% rate of return on invested assets.
1. Determine the profit margins for the Laser Division for 20Y6–20Y8.
2. Compute the investment turnover for the Laser Division for 20Y6–20Y8.
3. Compute the return on investment for the Laser Division for 20Y6–20Y8.
4. Evaluate the division’s performance over the 20Y6–20Y8 time period. Why was Hal concerned about the performance.
Transcribed Image Text:
FOX TECHNOLOGIES INC. Divisional Income Statements, Laser Division For the Years Ended December 31, 20Y6–20Y8 20Υ6 20Y7 20Υ8 $4,500,000 (2,625,000) $1,875,000 $7,000,000 (3,800,000) $3,200,000 Sales $3,000,000 Cost of goods sold (1,800,000) $1,200,000 Gross profi Operating expenses Operating income (300,000) $ 900,000 (300,000) $1,575,000 (400,000) $2,800,000
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