Three divisions of Jameson Co. report the following sales and operating data Fit
ID: 2519702 • Letter: T
Question
Three divisions of Jameson Co. report the following sales and operating data Fitness TrainingServices Athletic Wear Spa Sales Average operating assets Operating income Minimum required rate of return S 540,000 790,000 650,000 S 108,000 $ 158,000 130,000 S 27,000 S39,500 39,000 14% 16% 14% Required 1. Compute the ROI for each division, using the formula stated in terms of margin and turnover ROI Fitness training Spa services Athletic wear %i 2. Compute the residual income for each division Fitness Training Spa Services Athletic Wear Residual incomeExplanation / Answer
Jameson Co
ROI
Fitness Training
25%
Spa Services
25%
Athletic Wear
30%
Sales
Operating Income
Profit margin
Average Operating Assets
Turnover times
ROI = profit margin x turnover
Fitness Training
$540,000
$27,000
5%
$108,000
5
25%
Spa Services
$790,000
$39,500
5%
$158,000
5
25%
Athletic Wear
$650,000
$39,000
6%
$130,000
5
30%
ROI = profit margin x turnover ratio
For instance, ROI for Fitness = 5% x5 = 25%
Profit margin = operating income/sales x 100
For instance, profit margin for Spa Services = (39,500/790,000) x 100 = 5%
Turnover = sales/average operating assets
For instance, turnover for Athletic Wear = 650,000/130,000 = 5
Fitness Training
Spa Services
Athletic Wear
Residual Income
$11,880
$14,220
$20,800
Workings and computations –
Residual income = operating income – minimum return on assets invested
Minimum return on assets invested = average operating assets x minimum required rate of return
For instance, minimum return on assets invested for Fitness = $108,000 x 14% = $15,120
Residual income = operating income – minimum income = $27,000 - $15,120 = $11,880
Average Operating Assets
Minimum required rate of return
Minimum Required Income
Operating Income
Residual Income
Fitness Training
$108,000
14%
$15,120
$27,000
$11,880
Spa Services
$158,000
16%
$25,280
$39,500
$14,220
Athletic Wear
$130,000
14%
$18,200
$39,000
$20,800
ROI
Fitness Training
25%
Spa Services
25%
Athletic Wear
30%
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