Reference no: EM132325713
Question
Bella's Boats operates fishing tours in two locations off the coast of Singapore. Each location operates as a separate investment centre. All managers are rewarded based on annual improvements in return on investment (ROI). Investment is defined as total assets minus current liabilities.
The two locations are in Changi Village and Keppel Island. Details relating to the most recent year of operations for these locations are contained in the following table.
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Changi Village
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Kennel Island
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Sales revenue
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$ 400,000
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$ 600,000
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Variable costs
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130,000
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290,000
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Fixed costs
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30,000
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160,000
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Current assets
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120,000
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75,000
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Current liabilities
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60,000
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75,000
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Long-term assets
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1,540,000
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1,000,000
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REQUIRED:
Sales revenue Variable costs Fixed costs Current assets Current liabilities LonQ-term assets
400,000 130,000 30,000 120,000 60,000 1,540,000
600,000 290,000 160,000
a) For both locations calculate the following:
Return on investment;
Return on sales;
iii. Investment turnover.
b) Use the information you calculated in part a) to compare each location's performance in managing its revenues, costs and investments.
The manager of Bella's Boats at Keppel Island, Bella Lim, is aware that one of her fishing boats is getting old and this has resulted in increased maintenance and repair costs. Even worse, she suspects she is losing customers to her competitors. Bella has been considering purchasing a new boat and collected the following information.
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Investment in boat
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$300,000
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Expected additional annual revenues from increased customers
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$27,000
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Expected annual cost savings (from reduced maintenance, repairs, etc.)
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$12,000
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c) When Bella analysed the information contained in the table above, she decided not to purchase the boat. Explain what caused Bella to make this decision. Use calculations to support your answer.
d) Explain how the use of Residual Income to reward manager performance may have resulted in Bella deciding to purchase the new boat. Assume that Bella's Boats has an imputed interest charge of 12% for all its new investments. Show and label calculations to support your answer.