Heavy Machinery and Medical Supplies are two subsidiaries of a company.
If the entire $8 million investment invested in the heavy machinery subsidiary is sold off and the recovered investment is reinvested in the medical supplies subsidiary at the current rate of return on assets achieved by the medical supplies subsidiary, what will be the new rate of return on assets for the entire company?
redeployed: reallocated
According to LZ's request, explain again:
According to Collins English Dictionary: sell off vt. [tr, adverb] to sell (remaining or unprofitable items), esp at low prices (i.e. to sell the remaining or unprofitable items), esp at low prices). prices (that is, to sell off remaining or unprofitable items). This is where the heavy machinery subsidiary is partially sold off to the outside world, rather than being disposed of to the medical supplies subsidiary, so that there would be no redeployed later. Then the investment recovered from the sale of the heavy machinery subsidiary is reinvested in the medical supplies subsidiary (redeploy).
at the same rate of return on assets currently achieved means "consistent with the rate of return on assets currently achieved".
If we say that the medical supplies subsidiary also invested $8 million, it now has $16 million in assets. At the same rate of return on assets, it would have to double its earnings. Add the earnings of the other subsidiaries, and that's the company's total earnings.
This is managerial accounting fundamentals, and MBAs don't do this kind of question.
Just do it!
rate of return on assets currently achieved in the medical supplies division=1,200,000/8,000,000=15%
supposed net income of medical supplies division after redeployment of investment = 15% * (8,000,000+8,000,000)=2,400,000
the new total net income of the company= 2,400,000 +320,000=2,720,000
the new return on assets for the entire corporation= new net income / total assets = 2,720,000/(8,000,000+8,000,000+3,000,000)=2,720,000/(8,000,000+8,000,000+3,000,000)=3,000,000 ,000) = 2,720,000/19,000,000 ≈ 14.3%
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That's the end of it. If analyzed further:
rate of return on assets of the corporation currently achieved =(1,200,000+190,000+320,000)/19,000,000=9%
Therefore, the corporation can raise its rate of return on assets of 19,000,000=9%. the corporation can raise its rate of return on assets by more than 5% (14.1%-9%) if it carried out the investment redeployment.