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. Enter your ROl and Rate of Return Percentage answers to the nearest percentage (i.e., 0.12 should be entered as 12).) Company $ 320,000 $ 670,000 $ 770,000 53,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: $ 157,000 $ 152,000 22 % 191% 171% 15% Percentage Dollar amount 52,000 Residual income 5,000

Explanation / Answer

Calculation of missing data for company A

Return on Investment = Net Operating Income/Average Operating Assets

22% = Net Operating Income/$157,000

Net Operating Income = $157,000*22% = $34,540

Dollar amount for minimum required return = Average Operating Assets*Minimum % rate of return

= $157,000*17% = $26,690

Residual Income = Net Operating Income - Minimum required return

= $34,540 - $26,690 = $7,850

Calculation of missing data for company B

Average Operating Assets = Net Operating Income/Return on Investment

= $53,000/19% = $278,947

Minimum % required rate of return = Dollar Amount of Minimum required return/Average Operating Assets

= $52,000/$278,947 = 18.64%

Residual Income = Net Operating Income - Minimum required return

= $53,000 - $52,000 = $1,000

Calculation of missing data for company C

Minimum required return = Average Operating Assets*Minimum % rate of return

= $152,000*15% = $22,800

Net Operating Income = Residual Income+Minimum required return

= $5,000+$22,800 = $27,800

Return on Investment (ROI) = Net Operating Income/Average Operating Assets

= $27,800/$152,000 = 18.29%

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