Required: a. Compute the company\'s margin, turnover, and return on investment f

Question

Required:

a. Compute the company's margin, turnover, and return on investment for last year.

b. The Board of Directors of Beaker Company has set a minimum required return of 35%. What was the company's residual income last year?

Financial data for Beaker Company for last year appear below: Beaker Company Statements of Financial Position Beginning Balance Ending Balance Assets: Cash Accounts receivable Inventory Plant and equipment (net) Investment in Cedar Company Land (undeveloped) Total assets $ 288,000 126,000 264,000 442,000 243,000 458,000 $1,821,000 $ 189,663 191,000 286,000 450,000 262,000 458,000 $1,836,663 Liabilities and owners' equity: Accounts payable Long-term debt Owners' equity Total liabilities and owners' equity $ 252,000 841,000 728,000 $1,821,000 $ 223,000 841,000 772,663 $1,836,663 Beaker Company Income Statement Sales Less operating expenses Net operating income Less interest and taxes: $2,310,000 1,871,100 438,900 Interest expense Tax expense $105,4010 144,837 250,237 $ 188,663 Net income The company paid dividends of $144,000 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.

Explanation / Answer

Answer a

Margin = Net Operating income / Sales = $438,900 / $2,310,000 = 0.19 or 19 %

Turnover = Sales / Average operating assets

Average operating assets =( Beginning operating assets + Ending operating assets) / 2

Note : The land (undeveloped) & Investment in cedar company are not operating assets.

Average operating assets =[ ($1,821,000 - $458,000 - 243,000) + ( 1,836,663 - $458,000 - 262,000)] / 2

= ($1,120,000 + $1,116,663) / 2 = $1,118,331.50.

Turnover = $2,310,000 / $1,118,331.50. = 2.065 times

Return on investment = Margin * Turnover = 19 % * 2.065 times = 39.235%

Answer b

Residual income = Net Operating income - ( Average operating assets * minimum required return)

= $438,900 - ($1,118,331.50. * 35 %) = $47,483.97

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