Exercise 11.9 Return?n Investment (ROI) and Residual Income Relations L011-1, LO
ID: 2438743 • Letter: E
Question
Exercise 11.9 Return?n Investment (ROI) and Residual Income Relations L011-1, LO11-21 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 S 370,000 S 690,000 51,000 S 540,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: $ 162,000 S 149,000 25 % 15% 171% 141% Percentage Dollar amount 60,000 Residual income 4,000Explanation / Answer
Formulas used:
Net operating income = Average operating assets*Return on investment
Minimum required rate of return = Average operating assets * Minimum rate of return
Residual Income = Net operating income-Minimum required rate of return
A
B
C
Particulars
Calculation
Amounts
Calculation
Amounts
Calculation
Amounts
Sales
$3,70,000
$6,90,000
$5,40,000
Net operating income
(162,000*25%)
$40,500
$51,000
(ROI%-14%)*$149,000 = $4,000
ROI% = 17% (Rounded off)
Operating income = $149,000*16.6846%
$24,860
Average operating assets
$1,62,000
(51,000/15%)
$3,40,000
$1,49,000
Return on investment
25%
15%
(ROI%-14%)*$149,000 = $4,000
ROI% = 16% (Rounded off)
16%
Minimum required rate of return:
%
17%
(60,000/340,000)*100
18%
14%
Dollar amount
(162,000*17%)
$27,540
$60,000
(149,000*14%)
$20,860
Residual income =Net operating income-Minimum required rate of return
$12,960
($9,000)
$4,000
Formulas used:
Net operating income = Average operating assets*Return on investment
Minimum required rate of return = Average operating assets * Minimum rate of return
Residual Income = Net operating income-Minimum required rate of return
A
B
C
Particulars
Calculation
Amounts
Calculation
Amounts
Calculation
Amounts
Sales
$3,70,000
$6,90,000
$5,40,000
Net operating income
(162,000*25%)
$40,500
$51,000
(ROI%-14%)*$149,000 = $4,000
ROI% = 17% (Rounded off)
Operating income = $149,000*16.6846%
$24,860
Average operating assets
$1,62,000
(51,000/15%)
$3,40,000
$1,49,000
Return on investment
25%
15%
(ROI%-14%)*$149,000 = $4,000
ROI% = 16% (Rounded off)
16%
Minimum required rate of return:
%
17%
(60,000/340,000)*100
18%
14%
Dollar amount
(162,000*17%)
$27,540
$60,000
(149,000*14%)
$20,860
Residual income =Net operating income-Minimum required rate of return
$12,960
($9,000)
$4,000
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