Question

Exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1, L011-2) 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.) Company Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return S 400,000 $640,000 S 690,000 53,000 S 158,000 $143,000 24 % 171% 15% Percentage Dollar amount 91% $46,000 Residual income 6,000

Answer 1

Calculation:
Company A:
Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
24 = Net Operating Income / 158,000 * 100
Net Operating Income = $37,920

Minimum Required Rate of Return (in $) = Average Operating Assets * Minimum Required Rate of Return in %
Minimum Required Rate of Return (in $) = $158,000 * 15%
Minimum Required Rate of Return (in $) = $23,700

Residual Income = Net Operating Income – Minimum Required return
Residual Income = $37,920 - $23,700
Residual Income = $14,220

Company B:
Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
17 = 53,000 / Average Operating Assets * 100
Average Operating Assets = $311,765

Minimum Required Rate of Return (in $) = Average Operating Assets * Minimum Required Rate of Return in %
46,000 = $311,765 * Minimum Required Rate of Return in %
Minimum Required Rate of Return (in %) = 15%

Residual Income = Net Operating Income – Minimum Required return
Residual Income = $53,000 - $46,000
Residual Income = $7,000

Company C:
Minimum Required Rate of Return (in $) = Average Operating Assets * Minimum Required Rate of Return in %
Minimum Required Rate of Return (in $) = $143,000 * 9%
Minimum Required Rate of Return (in $) = $12,870

Residual Income = Net Operating Income – Minimum Required return
$6,000 = Net Operating Income - $12,870
Net Operating Income = $18,870

Return on Investment (ROI) = Net Operating Income / Average Operating Assets * 100
Return on Investment (ROI) = 18,870 / 143,000 * 100
Return on Investment (ROI) = 13%