Exercise 9-8 Return on Investment (ROI) and Residual Income Relations [LO1, LO2]
ID: 2504682 • Letter: E
Question
Exercise 9-8 Return on Investment (ROI) and Residual Income Relations [LO1, LO2]
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: (Negative amounts should be indicated with a minus sign. Do not round immediate calculations, but round your final answers to the nearest whole number.)
Company
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: (Negative amounts should be indicated with a minus sign. Do not round immediate calculations, but round your final answers to the nearest whole number.)
Explanation / Answer
Company
For Business A
Return on investment = Net operating income/ Average operating assets
Net operating income = 18%*154000 = 27720
Dollar amount = 16%*154,000 = $24640
Residual income = Net Income - Dollar amount = 27720-24640= $3080
For Business B
Return on investment = Net operating income/ Average operating assets
Average operating assets = 54000/18% = $300,000
Dollar amount = Percentage* Average operating assets
Percentage = 50,000/300,000= 17%
Residual income = 54000- 50000= $4000
For Business C
Residual income = Net Income - Dollar amount
5000 = Net income -9%*156000
Net operating income= $19040
Dollar amount = 9%*156000 = $14040
Return on investment = 19040/156000 = 12%
Company
A B C Sales $ 360,000 $ 690,000 $ 680,000 Net operating income $ $ 54,000 $ Average operating assets $ 154,000 $ $ 156,000 Return on investment (ROI) 18% 18% % Minimum required rate of return: Percentage 16% % 9% Dollar amount $ $ 50,000 $ Residual income $ $ $ 5,000Related Questions
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