Examining the Success of Shirts and Trousers Divisions on ROI

Answer 1
Schedule 1 Litre 15 Litre
Budgeted Sales Quantity A 32000 80000
Average Selling Price 0.2 1.2
Revenue Budget 64000 96000
Opening Inventory B 720000
Ending Inventory C 480000
Budgeted Production A+C-B 80000
Ending Inventory D 160000
Budgeted Production E 104000
Opening Inventory A+D-E 136000
Answer 2:

Calculation of cash received from debtors
Amount ($)
50% of credit sales of April $9,600.0 ( $19200*50%)
35% of credit sales of March $9,800.0 ( $28000*35%)
10% of credit sales of February $3,200.0 ( $32000*10%)
Total Cash received from debtors $22,600.0
Notes:
Total sales Credit sales @ 80%
January $50,000 $40,000.0
February $40,000 $32,000.0
March $35,000 $28,000.0
April $24,000 $19,200.0
May $50,000 $40,000.0

Cash sales will not be taken into account because question is about cash received from debtors
Answer 3:
Here we are provided with data of Cloths which is a company, with two main divisions of Shirts
and Trousers. We have been asked to examine the data of both the divisions and suggest which
division is more successful on ROI.
If we closely observe the given data the ROl of Trousers is 20% whereas its 15% on the Shirts.
As the return on investments for the Trousers is high when compared to Shirts it indicates
Trousers division is more successful in its operation than the other division.
2) Here it was stated that Cloths Ltd., is using the approach of Residual Income (RI) to measure
ite financial performance and asked to evaluate the RI for each of the divisions with different de-
sired returns as well as to state the division that is more successful with those returns.
Trousers Division Shirts division
Average Invested Capital $500,000 $3,000,000
Profit $100,000 $450,000
Now we will be evaluating the residual income with different rate of returns.
Calculation of residual income at the return of 12%,
The following is the formula for evaluating residual income (01),
Residual Income = Operating income - ( Rate of return X Average total assets )

Trousers
If we substitute the given values in the above formula we get 12% return as,
Residual Income = $100,000 - ($500,000 X 0.12)
=$40,000
Shirts
If we substitute the given values in the above formula we get 12% return as,
Residual Income = $450,000 - ($3,000,000 X 0.12)
=$90,000
Calculation of residual income at the return of 15%,
Trousers
If we substitute the given values in the above formula we get 15% return as,
Residual Income = $100,000 - ($500,000 X 0.15)
=$25,000