Return on Investment and Residual Income The Emergency Medical Services Company

Question

Return on Investment and Residual Income
The Emergency Medical Services Company has two divisions that operate independently of one another. The financial data for the year 20X5 reported the following results:

The company's desired rate of return is 10%. Income is defined as operating income.

a. What are the respective return-on-investment ratios for the North and South divisions?

Round ROI to the nearest whole percentage.

b. What are the respective residual incomes of the North and South divisions?

North South Sales $3,720,000 $3,220,000 Operating income 930,000 730,000 Taxable income 785,000 510,000 Investment 6,000,000 5,000,000

Explanation / Answer

a.

ROI = operting income / investment *100

for north:

$930,000 / 6,000,000

=>15.5%

=>16%........(rounded to nearest whole percentage).

south:

.$730,000 /5,000,000 * 100

=>14.6%

=>15%

b.

residual income = actual income - minimum required income

here,

north:

here,

actual income = $930,000.

minimum income = 10% *6,000,000 =>$600,000.

residual income = $930,000 - 600,000 =>$330,000.

south:

actual income = $730,000

minimum income = 5,000,000 * 10% =>$500,000

residual income = $730,000 - $500,000 =>$230,000.

ROI North 16% South 15%.

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