Exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1,

Question

Exercise 11-9 Return on Investment (ROI) and Residual Income Relations [LO11-1, LO11-2] 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) Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return: 5 450,000 5 680,000 5 500,000 46,000 5 154,000 5 143,000 25 | % 181% 181% 11% Dollar amount 49,000 Residual income 5,000

Explanation / Answer

Return on Investment (ROI) = Net operating income / Average operating assets

Residual income = Operating income - (Operating assets * Required rate of return)

Company A Company B Company C Sales 450,000 680,000 500,000 Net operating income 38,500 (154,000*25%) 46,000 20,730 (5,000+15,730) Average operating assets 154,000 255,556 (46,000/18%) 143,000 Return on investment (ROI) 25% 18% 15%(20,730/143,000) Minimum required rate of return : Percentage 16% 19% 11% Dollar amount 24,640 (154,000*16%) 49,000 15,730 (143,000*11%) Residual income 13,860 (38,500-24,640) -3,000 (46,000-49,000) 5,000

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