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StormLrd StormLrd
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5 years ago
Consolidated Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for the current year are as follows:

   Maple Street   Oak Street   Hickory Street
Revenue   $17,000,000   $13,500,000   $15,000,000
Operating assets   7,000,000   7,000,000   5,000,000
Current liabilities   300,000   250,000   360,000
Net operating income   960,000   1,150,000   910,000

Required:
a.   Compute the return on investment for each station.
b.   Which station manager is doing best based only on ROI?
c.   Are any of the stations under performing?
d.   Should the required rate of return be the same for each station if the business risks are different? Explain.
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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btpsandbtpsand
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More solutions for this book are available here
a.   Maple    = $960,000/$7,000,000   = 0.137
   Oak    = $1,150,000/$7,000,000   = 0.164
   Hickory   = $910,000/$5,0,000      = 0.182

b.   Hickory Street was doing the best because the ROI was the highest.

c.   Maple Street is in danger of being shut down because it is only making a return on its investment base of 13.7%. This is less than the required rate of return of 15%.

d.   If the risks are different then the company should use a risk adjusted ROR for each station to account for the different risk profiles.
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StormLrd Author
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5 years ago
Smart ... Thanks!
jamesbove
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Yesterday
Helped a lot
brina10
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2 hours ago
this is exactly what I needed
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