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    07 Activity 2

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    ishmaelcascabel

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    07 Activity 2

    Uploaded by

    ishmaelcascabel
    4 views3 pages

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    4 views3 pages

    07 Activity 2

    Uploaded by

    ishmaelcascabel

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 3

    Ishmael Cascabel BSIS2A

    1. The management of International Heal Medical Company is evaluating the


    performance of its three (3) divisions. The Booboo Division had an operating
    profit of ₱24,950 and, on average, used assets with a book value of
    ₱311,900. The Splint Division had an operating profit of ₱17,500 and used
    average assets of ₱177,950. The Intensive Care Division had an operating
    profit of ₱28,500 and average assets of ₱475,000. The company plans to
    award the Intensive Care Division, relying on its high operating profit. Should
    the management continue with this decision? Justify your answer.

    Booboo Division

    ₱ 2490
    ROA = ₱ 311900 = 0.080 or 8%

    Splint Division

    ₱ 17500
    ROA = ₱ 177950 = 0.098 or 9.8%
    Intensive Care Division

    ₱ 28500
    ROA =
    ₱ 475000
    = 0.060 or 6%

    Even though the Intensive Care Division has the highest profit it had the lower
    ROA and on the other hand Splint Division had the highest ROA therefore the
    management should rethink its award to Intensive Care Division as it says
    therefore that Intensive Care Division had less efficient use of assets. In
    conclusion the management should not continue on awarding the Intensive
    Care Division but instead it should reward the Splint Division whereas it has
    the highest ROA.

    2. Charlie’s Construction Company is a growing construction business with a


    few contracts to build storefronts in Pasay. Charlie’s balance sheet shows the
    beginning assets of ₱1,000,000 and an ending balance of ₱2,000,000. During
    the current year, Charlie’s company had a net income of ₱20,000,000.
    Compute the company’s return on assets and interpret the results.

    Net Income
    Return of Assets = Average Total Assets

    # Find Average Total Assets first

    ₱ 1 000 000+ ₱ 2 000 000


    Average Total Assets = 2 = ₱ 1 500 000
    # Find ROA

    ₱ 20 000 000
    ROA =
    ₱ 1 500 000
    = 13.33 or 1333.33%

    A ROA of 1333.33% means that Charlie’s contruction company is generating


    a huge amount of profit and his company is utilizing its assets efficiently.

    3. Dave’s Guitar Shop is considering building an additional property onto the


    back of its existing building for more storage. Dave consults with his banker
    about applying for a new loan. The bank asks for Dave’s balance to examine
    his overall debt levels. Dave’s total assets are ₱5,000,000, while his total
    liabilities are ₱25,000. Compute Dave’s debt ratio.

    Total Liabilities
    Return of Assets = Total Assets

    # Find Debt Ratio

    ₱ 25 000
    Debt Ratio =
    ₱ 5 000 000
    = 0.005 or 0.5%

    Dave’s Guitar Shop does not really rely on debts thus explaining why his Debt
    Ratio is very low which is 0.5%.

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