32. Taylor Industries would like to become more vertically integrated. They are
ID: 2377325 • Letter: 3
Question
32. Taylor Industries would like to become more vertically integrated. They are considering the purchase of one or more of the companies in their supply chain. Calculate the ROI and residual income for each company. Show all work.
_____A_____ _____B_____ ____ C_____
Sales $3,600,000 $5,000,000 $1,500,000
Net Operating Income 240,000 220,000 96,000
Average Operating Assets 1,200,000 2,000,000 800,000
Minimum required rate of return: 10% 8% 14%
Explanation / Answer
Company A
Sales $3,600,000
Net Operating Income 240,000
Average Operating Assets 1,200,000
Minimum required rate of return: 10%
Return of Investments = Net Profit/Total Assets
ROI = $240,000/$1,200,000
ROI = 0.20 or 20%
Residual Income = Operating Income - (Operating Assets x Target Rate of Return)
RI = 240,000 - (1,200,000 x .10)
RI = 240,000 -120,000
RI = $120,000
Company B
Sales $5,000,000
Net Operating Income 220,000
Average Operating Assets 2,000,000
Minimum required rate of return: 8%
Return of Investments = Net Profit/Total Assets
ROI = $220,000/$2,000,000
ROI = 0.11or 11%
Residual Income = Operating Income - (Operating Assets x Target Rate of Return)
RI = 220,000 - (2,000,000 x .08)
RI = 220,000-160,000
RI = $60,000
Company C
Sales $1,500,000
Net Operating Income 96,000
Average Operating Assets 800,000
Minimum required rate of return: 14%
Return of Investments = Net Profit/Total Assets
ROI = $96,000/$800,000
ROI = 0.12 or 12%
Residual Income = Operating Income - (Operating Assets x Target Rate of Return)
RI = 96,000 - (800,000 x .14)
RI = 96,000 - 112,000
RI = (16, 000)
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