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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Impact of an Asset Disposal on Performance Measures
Noonan Division has total assets (net of accumulated depreciation) of $2,200,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $200,000. Expected divisional income in year 1 is $330,000 including $28,000 in income generated by the machine (after depreciation). Noonan’s cost of capital is 12 percent. Noonan is considering disposing of the asset today (the beginning of year 1).
Required
a. Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset?
b. What would divisional ROI be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?
c. Noonan computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset?
d. What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?
Verified
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Given,
Divisional assets (net of accumulated depreciation) of Division “N” is $2,200,000
Expected divisional income of division “N” is $330,000
Cost of capital is 12% or 0.12
Net book value of the machine considered for disposing is $200,000
Decrease in sales/cash inflows with respect to disposal of the machine is $28,000
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