Question

A family friend has asked your help in analyzing the operations of three anonymous companies 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.)

Answer 1

Company A:

Return on investment = Net operating income / Average operating assets
0.17 = Net operating income / $167,000
Net operating income = $28,390

Minimum required rate of return in dollar = Minimum required rate of return in percentage * Average operating assets
Minimum required rate of return in dollar = 0.15 * $167,000
Minimum required rate of return in dollar = $25,050

Residual income = Net operating income - Minimum required rate of return in dollar
Residual income = $28,390 - $25,050
Residual income = $3,340

Company B:

Return on investment = Net operating income / Average operating assets
0.17 = $43,000 / Average operating assets
Average operating assets = $252,941

Minimum required rate of return in dollar = Minimum required rate of return in percentage * Average operating assets
$51,000 = Minimum required rate of return in percentage * $252,941
Minimum required rate of return in percentage = 0.20 or 20%

Residual income = Net operating income - Minimum required rate of return in dollar
Residual income = $43,000 - $51,000
Residual income = -$8,000

Company C:

Minimum required rate of return in dollar = Minimum required rate of return in percentage * Average operating assets
Minimum required rate of return in dollar = 0.09 * $156,000
Minimum required rate of return in dollar = $14,040

Residual income = Net operating income - Minimum required rate of return in dollar
$8,000 = Net operating income - $14,040
Net operating income = $22,040

Return on investment = Net operating income / Average operating assets
Return on investment = $22,040 / $156,000
Return on investment = 0.14 or 14%