Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 39

Applications of ROI using DuPont model; manufacturing versus service  firm Manyops, Inc., is a manufacturing firm that has experienced strong competition in its traditional business. Management is considering joining the trend to the “service economy” by eliminating its manufacturing operations and concentrating on providing specialized maintenance services to other manufacturers. Management of Manyops, Inc., has had a target ROI of 15% on an asset base that has averaged $6 million. To achieve this ROI, average asset turnover of 2 was required. If the company shifts its operations from manufacturing to providing maintenance services, it is estimated that average assets will decrease to $1 million.

Required:

a.Calculate net income, margin, and sales required for Manyops, Inc., to achieve its target ROI as a manufacturing firm.

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b. Assume that the average margin of maintenance service firms is 2.5%, and that the average ROI for such firms is 15%. Calculate the net income, sales, and asset turnover that Manyops, Inc., will have if the change to services is made and the firm is able to earn an average margin and achieve a 15% ROI.

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Applications of ROI variable using DuPont model; Manufacturing v/s Service firm

DuPont model : This method says assets are assessed at their gross value rather than their net value in order to make a maximum return on equity (ROE).