Book review
Florence Industries, Inc. is a company which provides three entirely different types of products and services through three divisions of the company: consumer products division, industrial products division and professional services. Each division is treated as an entirely different company and the performance evaluation criteria is return on assets in recent years after major shift. Although, the divisions used to be treated as profit centres, this decision meant they are treated more as investment centres.
The Company in 2008 & 2009:
From the income statement for 2008 and 2009, it is noticed that there is an increase in revenue by 4% and 11% increase in net profit in 2009. From balance sheet for 2008 and 2009 it is noticed that Florence has issued shared and borrowed long term loan in order to invest in project required high asset cost as the company asset has increased by $ 50,460,000 during 2009.
The Company has also declared a dividend to equity of $ 12,570,000 during 2009 and keep $ $11,736,000 to meet future expansion and expense of business
Issues and Analysis:
Rejecting Proposals Just Based On Gross Margin Requirement: CFO Ben Johnson has recently rejected the new product proposal of product development manager of consumer products division Calvin Marone as its estimated return of 13.67%(exhibit 1) per year was less than the 15% minimum gross return % requirement any new investment proposal should generate in order to get approve. The company’s 2007 gross return was 9.3 % and Ben estimated that it should go up easily to 12% and set target for each division to bring new product proposal of more than 15% gross return generating capabilities. Then again, gross return of Company in 2009 after rejecting the Marone’s proposal was 9.4%. Suppose if Marone’s proposal would have been accepted, then the Company 2009 gross return would have been approximately 9.6% (Exhibit 2) which would have been even higher than 2008 gross return of 9.5%. So, rejecting
The Company in 2008 & 2009:
From the income statement for 2008 and 2009, it is noticed that there is an increase in revenue by 4% and 11% increase in net profit in 2009. From balance sheet for 2008 and 2009 it is noticed that Florence has issued shared and borrowed long term loan in order to invest in project required high asset cost as the company asset has increased by $ 50,460,000 during 2009.
The Company has also declared a dividend to equity of $ 12,570,000 during 2009 and keep $ $11,736,000 to meet future expansion and expense of business
Issues and Analysis:
Rejecting Proposals Just Based On Gross Margin Requirement: CFO Ben Johnson has recently rejected the new product proposal of product development manager of consumer products division Calvin Marone as its estimated return of 13.67%(exhibit 1) per year was less than the 15% minimum gross return % requirement any new investment proposal should generate in order to get approve. The company’s 2007 gross return was 9.3 % and Ben estimated that it should go up easily to 12% and set target for each division to bring new product proposal of more than 15% gross return generating capabilities. Then again, gross return of Company in 2009 after rejecting the Marone’s proposal was 9.4%. Suppose if Marone’s proposal would have been accepted, then the Company 2009 gross return would have been approximately 9.6% (Exhibit 2) which would have been even higher than 2008 gross return of 9.5%. So, rejecting