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

Question

6 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) 12.5 points Company Skipped $700,000 610,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of returrn $440,000 $44,000 eBook Print References $168,000 $149,000 21% 161% Percentage 16 % 15% Dollar amount $43,000 Residual income 5,000

Explanation / Answer

Company A:-

Net operating income = ROI × Average operating assets = 21% × 168,000 = $35,280

Minimum rate of return (Dollar amount) = Minimum rate of return (percentage) × Average operating assets = 16% × 168,000 = $26,880

Residual income = Net operating income - Minimum rate of return (Dollar amount) = 35,280-26,880 = $8,400

Company B:-

Average operating assets = Net operating income ÷ ROI = 44,000÷16% = $275,000

Minimum rate of return (percentage) = Minimum rate of return (Dollar amount) ÷ Average operating assets × 100 = 43,000÷275,000×100 = 15.64% = 16%

Residual income = Net operating income - Minimum rate of return (Dollar amount) = 44,000-43,000 = $1,000

Company C:-

Minimum rate of return (Dollar amount) = Minimum rate of return (percentage) × Average operating assets = 15% × 149,000 = $22,350

Net operating income = Minimum rate of return (Dollar amount) + Residual income = 5,000+22,350 = $27,350

ROI = Net operating income ÷ Average operating assets × 100 = 27,350÷149,000×100 = 18.36% = 18%

A B C Sales $440,000 $700,000 $610,000 Net operating income $35,280 $44,000 $27,350 Average operating assets $168,000 $275,000 $149,000 Return on investment (ROI) 21% 16% 18% Minimum required rate of return: Percentage 16% 16% 15% Dollar amount $26,880 $43,000 $22,350 Residual income $8,400 $1,000 $5,000

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