Zwann Systems develops and manufactures residential water fi

Zwann Systems develops and manufactures residential water filtration units that are installed under the sink. The filtration unit removes chlorine and other chemicals from drinking water. This Dutch company has successfully expanded sales of its units in the European market for the past 12 years. Six years ago, Zwann started a US manufacturing and marketing division and three years ago, an Australian manufacturing and marketing division. Summary operating data for the last fiscal year are: Zwann Systems Summary of Operations Last Fiscal Year (millions of ) Australia Netherlands Sales Divisional expenses Net profit 50 38 12 US 75 58 17 Tota 180 129 51 Senior management is in the process of evaluating the relative performance of each division. While the Netherlands division is the largest and generates the most profit, this division also has the largest asset investment, as indicated by the following

Solution

Q1-a.Calculation of Return on Investment(ROI) And Residual income

1.ROI before any corporate overhead allocations.

Residual Income before any corporate overhead allocations.

2.ROI after any corporate overhead allocations.

Residual Income after any corporate overhead allocations.

Q1-b.ROI gives companies a means to compare the effectiveness and profitability of any number of investments. Residual income measures the net income an investment earns beyond the lowest return on its operational assets.

Formula

The formula to calculate ROI is:

Net Income / Investment

The formula to calculate residual income is:

Where,
   A = Department\'s net operating income;

B = Average operating assets of the department
C = Minimum required return on assets.

Q-1c.Evaluation of the performance of each division.

Sr.no	Puriculers	Australia	Netherlands	US
A	Net Income	12	22	17
B	Net Asset	80	195	131
C	Return On investment (A/B)	15%	11.28%	12.98%