Question

Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below:

   Ur    Babylon

Fixed assets, gross	2,500	4,000
Accumulated depreciation	1,500	1,200
Other assets	500	750
Liabiities	500	1,000
Sales	6,750	7,200
Net Income after tax	743	1,008
Average age of fixed assets	15	5

MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125. *Net income is after tax but before interest.

UR can increase its ROI by

a. increasing product contribution margin

b. increasing sales volume

c. reducing discretionary expenses

d. al of the above

Answer 1

d) All of the above.

Given the condition of the questions, to Increase ROI (Return of Income) company has to increase its Net Income after tax.

The net income after tax can be increased by all the conditions mentioned in a), b) and c). Therefore, answer to the question shall be d) all of the above.

Explanations:

a) Increasing product contribution margin: it results in extra contribution per unit and hence it will result in increase in profit on all the products taken together.

b) Increase in sales volume: Each unit gives a particular sales margin, we also call it as contribution. As the number of units go on increasing total contribution will increase and in effect Net Income after tax will increase.

c) reducing discretionary expenses: reduction in expenses always gives better net income margin, hence it gives better Net Income after tax.

Hence, answer is all of the above.