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Fzvyrl9372

Business Finance

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Make sure your submission is structured as requested: a 1-2 page memo to your client, with financial analyses (i.e., the required case questions) incorporated into the memo and/or attached. I will not look at submissions copied from the case materials. Please follow the instructions as given.

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Willowbrook Company You are the Vice President of Operations for Willowbrook Company, a decentralized company that makes several varieties of drinks, making soft drinks, cider-based drinks, and coffee drinks. Each division is run as an investment center, with the manager’s performance evaluation based on their division’s ROI. In addition to the information below, there are $182,000 in corporate costs, which are allocated to the divisions based on the number of units sold at each division. These costs are due to employee benefits, which are billed at the corporate level. Willowbrook has the following data for this year: Sales # of units sold # of employees Gross margin Selling and administrative costs Average net operating assets Soft Drinks Division $500,000 100,800 540 $260,000 $59,520 $320,000 Cider Division $1,300,000 378,000 200 $425,000 $377,620 $800,000 Coffee Division $800,000 361,200 360 $460,000 $231,900 $420,000 Willowbrook Company has a target annual rate of return of 22 percent, a weighted-average cost of capital 16% and are subject to 30% income taxes. The Soft Drinks Division was recently presented with an investment in a $125,000 piece of machinery that would have net cash inflows of $29,000 per year over a period of fifteen years. The manager of the Soft Drinks Division, with full decision rights on the matter, decided against replacing the current equipment. The CEO of Willowbrook, David Copperfield, heard about the investment opportunity and is confused about the outcome. From his initial conversations with the Soft Drinks Division’s manager, it sounded like a good investment. Copperfield is also reconsidering its cider-based drinks division - in each of the three previous years, Cider has shown a net loss. When Copperfield launched the Cider product line four years ago, he gave the division manager until this year to come ‘out of the red’. At this point, Willowbrook has not identified an alternate use for the Cider production space, and all three divisions are currently running below capacity. If the Cider division was eliminated, the allocated corporate costs would decrease by $12,000. Although Cider appears to be a losing investment, Copperfield wants a full financial analysis showing how Willowbrook overall will be affected if the Cider division was discontinued. Required: Write your response in the form of a 1-2 page memo to David Copperfield, from the perspective of the VP of Operations, a position that oversees all three divisional managers. Be sure to include all your financial analyses, clearly showing your calculations, to support your conclusions. a. Create a multilevel income statement, showing the three divisional operating incomes and the corporate net income (for Willowbrook overall). b. Calculate the current annual ROI, residual income and EVA for the Soft Drinks division. c. Was the machine a good investment? Provide the appropriate financial analysis(es) to support your conclusion. d. Did the Soft Drinks division manager make the ‘right’ decision (i.e., was it in Willowbrook’s overall best interest for the Soft Drinks division to reject the investment)? Explain your answer. Your answer from parts b and c. should inform your evaluation. e. Recreate the multilevel income statement from requirement (a) showing the overall effect on net income if Willowbrook were to discontinue the Cider product line. Provide a recommendation on whether to discontinue the Cider product line. f. Provide a recommendation on a different allocation base for corporate overhead. Take Home Grading Rubric: Item Segmented Income Statement Points Allocated 1 Soft Drinks current ROI Soft Drinks current residual income Soft Drinks current EVA 1 1 1 Soft Drinks investment financial analysis Conclusion re: Soft Drinks investment 1 1 Income statement without Cider Recommendation on discontinuing Cider Recommendation on corporate overhead 1 1 1 Written Memo Formatting Recommendations are consistent with analysis Total Points for Take Home 6 4 1 20
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Explanation & Answer

Attached.

Willowbrook company
Multi Level Income Statement
Division
Sales
Cost of goods sold
Gross margin
Selling and administrative costs
Operating income
Taxes (30%)
Net income

Soft Drinks
Coffee
Total
$500.000
$800.000
$1.300.000
$240.000
$340.000
$580.000
$260.0...


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