A family friend has asked your help in analyzing the operations of three anonymo

Question

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 $720,000 $47,000 $ 450,000 $ 550,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of $170,000 $156,000 171% 20 | 90 0 return 151% 13% Percentage Dollar amount $51,000 Residual income 7,000

Explanation / Answer

SOLUTION

COMPANY - A

1. Return on investment = Net operating income / Average operating assets

17% = Net operating income / $170,000

Net operating income = $170,000 * 17% = $28,900

2. Minimum required rate of return (Dollar amount)

= Average operating assets * Minimum required rate of return (percentage)

= $170,000 * 15% = $25,500

3. Residual Income = Net operating income - Minimum required rate of return (Dollar amount)

= $28,900 - $25,500 = $3,400

COMPANY - B

1. Return on investment = Net operating income / Average operating assets

20% = $47,000 / Average operating assets

Average operating assets = $47,000 / 20% = $235,000

2. Minimum required rate of return (Dollar amount)

= Average operating assets * Minimum required rate of return (percentage)

$51,000 = $235,000 * Minimum required rate of return (percentage)

Minimum required rate of return (percentage) = $51,000 / $235,000 = 22%

3. Residual Income = Net operating income - Minimum required rate of return (Dollar amount)

= $47,000 - $51,000 = (4,000)

COMPANY - C

1. Minimum required rate of return (Dollar amount)

= Average operating assets * Minimum required rate of return (percentage)

= $156,000 * 13% = $20,280

2. Residual Income = Net operating income - Minimum required rate of return (Dollar amount)

$7,000 = Net operating income - $20,280

Net operating income = $20,280 + $7,000 = $27,280

3. Return on investment = Net operating income / Average operating assets

= $27,280 / $156,000 = 17%

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