Question

A family friend has asked your help in analyzing the operations of three anonymous companles operating in the same service sector Industry, Supply the missing data in the table below: (Loss amounts should be indicated by a minus sign. Round your percentage answers to nearest whole percent and other amounts to whole dollars.) Company $ 430,000 $ 520.000 $ $ 700,000 30,000 $ $ 149,000 156,000 16 % 16 % Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: Percentage Dollar amount Residual income La $ 68,000

Answer 1

Solution Sales Company AB $430,000 $700,000 $24,960 $39,000 $156,000 $243,750 16% 16% $520,000 $21,390 $149,000 14% Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: Percentage Dollar amount Residual income 16% $24,960 $0 24% $58,000 ($19,000) 11% $16,390 $5,000 Calculation of Missing data for Company A Net operating income Return on investment = Net operating income / Average operating assets 16% = Net opearting income / $156,000 Net Operating income = $156,000 x 16% = $24,960 Minimum Required raturn (Dollar amount) Minimum required return = Average operating assets x Minimum required rate of return = $156,000 x 16% = $24,960 Residual income Residual income = Net operating income - Minimum required return = $24,960 - $24,960 = $0 Calculation of Missing data for Company B Average operating assets Return on investment = Net operating income / Average operating assets 16% = $39,000 / Average operating assets Average operating assets = $39,000 / 16% = $243,750

Minimum required rate of return Minimum required return = Average operating assets x Minimum required rate of return $58,000 = $243,750 x Minimum required rate of return Minimum required rate of return = $58,000 / $243,750 = 24% Residual income Residual income = Net operating income - Minimum required return = $39,000 - $58,000 = $19,000) Calculation of Missing data for Company C Minimum Required raturn (Dollar amount) Minimum required return = Average operating assets x Minimum required rate of return = $149,000 x 11% = $16,390 Net operating income Residual income = Net operating income - Minimum required return $5,000 = Net Operating income - $16,390 Net operating income = $5,000+ $16,390 = $21,390 Return on investment (ROI) Return on investment = Net operating income / Average operating assets Return on investment = $21,390 / $149,000 = 14%