Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below: $$\begin{array} { | l | r | r | }
\hline & \mathbf { U r } & \text { Babylon } \
\hline \text { Fixed assets, gross } & \$ 2,500 & \$ 4,000 \
\hline \text { Accumulated depreciation } & \$ 1,500 & \$ 1,200 \
\hline \text { Other assets } & \$ 500 & \$ 750 \
\hline \text { Liabilities } & \$ 500 & \$ 1,000 \
\hline \text { Sales } & \$ 6,750 & \$ 7,200 \
\hline \text { Netincome aftertax } & \$ 743 & \$ 1,008 \
\hline \text { Average age of fixed assets (years) } & 15 & 5 \
\hline
\end{array}$$ *Net income is after tax but before interest MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125.
Ur can increase its ROI by:

Question

Mesopotamian Materials Inc. (MMI) has two decentralized divisions (Ur and Babylon) that have decision making responsibility over the amount of resources invested in their divisions. Recent financial extracts for both divisions are presented below: $$\begin{array} { | l | r | r | } 
\hline & \mathbf { U r } & \text { Babylon } \
\hline \text { Fixed assets, gross } & \$ 2,500 & \$ 4,000 \
\hline \text { Accumulated depreciation } & \$ 1,500 & \$ 1,200 \
\hline \text { Other assets } & \$ 500 & \$ 750 \
\hline \text { Liabilities } & \$ 500 & \$ 1,000 \
\hline \text { Sales } & \$ 6,750 & \$ 7,200 \
\hline \text { Netincome aftertax } & \$ 743 & \$ 1,008 \
\hline \text { Average age of fixed assets (years) } & 15 & 5 \
\hline
\end{array}$$ *Net income is after tax but before interest MMI's weighted average cost of capital (WACC) is 11.5%. The MMI measures division performance based on the book value of net assets. The producer price index 15 years ago was 100, 116 five years ago, and currently is 125.
Ur can increase its ROI by:

Quizplus · Accepted Answer

ROI (return on investment) can be increased by increasing the numerator (net income) or decreasing the denominator (average operating assets).

Choices A and B would help increase net income by increasing the product contribution margin or sales volume, respectively.

Choice C would help decrease average operating assets by reducing discretionary expenses.

Choice D (taking on debt) may increase net income due to the interest tax shield, but it would also increase the average operating assets which could lead to a lower ROI.

Therefore, the best choice(s) to increase ROI for Ur is to increase product contribution margin, increase sales volume, and reduce discretionary expenses, and hence the answer is E.

Mesopotamian Materials Inc *Net Income Is After Tax but Before Interest MMI's Weighted