Fletcher Industries manufactures a range of household products. Roger Wilkie is head of the Hardware Division and he has just experienced a terrible nine months. ‘If it could go wrong it did. Sales are down profits are down, inventories are out of control and I am starting to get worried about my job.
Wilkies performance is based on his division’s ROI. The following data relates to the past nine months:
Sales…………………………………………..$10,800,000
Operating profit……………………………………810,000
Invested capital………………………………..13,500,000
In an effort to make something out of nothing and to salvage the current years performa considering some of the following strategies:
1. Write off and discard $135,000 of obsolete inventory.
2. Accelerate the collection of $180,000 of overdue customer accounts receivable.
3. Stop advertising for the next three months and reduce expenditure on repairs and maintenance. This will save the division $337,500.
4. Acquire two competitors that are expected to have the following financial characteristics:
Required:
1. Calculate ROI and the two Component ratios for the Hardware Division for the last nine months.
2. Evaluate the first two strategies, by considering their effect on the division’s last nine months performance. Should these strategies be adopted?
3. Evaluate the third strategy. Should it be adopted?
4. Calculate the ROI of the investment in Andrews and then in Brown. Should Fletcher reject both acquisitions, acquire one or acquire both? Assume that there is sufficient capital available to fund both investments.
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