Question

10-12 Return on investment (LO 3) Dale Decor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows: 12% Retail Stores Internet Catalog Sales Sales revenue $10,000,000 $4,000,000 $3,200,000 Variable expenses 4,000,000 1,500,000 1,800,000 Direct fixed expenses 4,500,000 1,000,000 1,200,000 Average assets 8,000,000 4,000,000 2,000,000 Required rate of return 12% 12% Required a. Calculate the margin, asset turnover, and ROI for each of the three distribution channels. b. The corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $800,000 and is expected to generate $160,000 in additional annual segment margin. If distribution channel managers are evaluated based on the trend of their ROIs, which managers will invest in the system? Explain your reasoning.

Answer 1

0 Maugin: Internet - - Retail Stores Catalog sales - (a) Revenue 7 (6) Variable Exp (5) Contributin - on Maulin (a-b) (d) mangin (%) (C a) 10000000 4000000 6000000 4000000 1500000 25 00000 3200 000 1800ooo 1 400000 60% 62.5% 43-75% 2 Asset Twinoues: Retail Stores Internet - Calaloa Sales 4000000 4000000 32000 00 2000.000 (a) (6) (6) Revenue Accets (Aug Asset turnover [atb] 10000000 8000000 1.25 times times times

PEN Return on 3. - Investment & ROI): Retail Stores Internet Catalog Sales Margin G000000 (-) Direct expenses 4500 000 Net Operating Income (1500000 - Assets & Investment 8000000 ROI = Net Opercaline Income 18.75 D Aseest/ Investment 2500000 looo000 1500000 4oooooo 37.5% 1400 000 1200000 200 000 200cooo 102 (4. Residual Income: Retail Stores Internet Catalog Sales 1 500 000 (a) Net operating income (6) Operating Assets (C) Required rate of Retwin (d) Residual Income [a- (bxc/ 150000 8000000 12%. 540000 200000 2000000 12% (40000) 4000000 127. 10 20000 L