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?

c. Which division has the better return on investment and which division has the better residual income figure?

Return on investment

AnswerNorthSouth

Residual income

AnswerNorthSouth

North South Sales $3,480,000 $2,980,000 Operating income 870,000 670,000 Taxable income 740,000 465,000 Investment 6,000,000 5,000,000

Explanation / Answer

ROI = Operating income /Investment a North 15% =870000/6000000 South 13% =670000/5000000 b Residual Income North 270000 =870000-(6000000*10%) South 170000 =670000-(5000000*10%) c Return on investment North Residual income North

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