Question

E10-10 Determining the Impact of Various Transactions on Investment Turnover, ROI, Residual Income, and Profit Margin [LO 10-4, 10-5 Poseldon Corporation manufactures a varlety of gear for water sports. Poseidon has three divisions: Leke, River, and Ocean. Each division is managed as an invesiment center. During the current year, the Ocean dhision experienced the following transactions: pedal order Was acepl se in ubentd Th pr otnl anriand ess canachy The selling price was in axcass of total variabla costs pics. The compeny axperianced a surge in sales during the summer months Salas retumed to thair normal level for tha ramainder of the vear g d Founment ring 5500 000 to 10 percent with no effect an the minimum required rate of rehurn m8 parce ne L The cemare i Required: n raturn on invasiment, rasidual incoma, and aconomic valua added Use tha table below to arganiza your answars Use ) for increasa, (D) for decrease. (N) for na effact, to datermine the impact of the transaction Each transaction should be treatad indapendantly impact Raturn on Residual Economic Transaction

Answer 1

ROI is net income expressed in relation to the amount invested
Residual income is net income over& above the investor's predetermined minimum required return.
EVA is the after-tax operating profits netted with the charges for usage of that operating capital or assets, ie. Operating assets*Cost of capital---to assess the efficiency of the investment's performance.
EVA=NOPAT-(Operating assets*Cost of capital)
Transacns	ROI	Res.Inc.	EVA	Reasons
a.	Increase	Increase	Increase	Revenues Increase
b.	Increase	Increase	Increase	Costs/Salary expense will decrease
c.	Increase	Increase	Increase	Increased sales revenues for part of the year
d.	Decrease	Decrease	Decrease	Capital asset has increased & also depreciation expense
e.	Remains same	Remains same	Decrease	Increase in cost of capital decreases EVA
f.	Increase	Increase	Increase	Tax expense will decrease.