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 Positior Beginning Balance Ending Balance AssetS: Cash Accounts receivable Inventory Plant and equipment (net) Investment in Cedar Company Land (undeveloped) Totalassets $ 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 $105,400 144,837 250,237 $ 188, 663 Net income The company paid dividends of $144,000 last year. The "lInvestment in Cedar Company" on the statement of financial position represents an investment in the stock of another company

Explanation / Answer

a)Margin : Net operating income /sales

         = 438900/2310000

         = .19 or 19%

Turnover :sales /Avergae asset

      =2310000/1118331.5

     = 2.06558

Return on investment =margin *turnover

           = 19*2.06558

        = 39.25%

**Investment in Operating asset

Beginning : Total asset -investment in other co -undeveloped land

   = 1821000-243000-458000

= 1120000

Ending balance :1836663-262000-458000 = 1116663

Average asset =[1120000+1116663]/2 =1118331.50

b)Residual income =Net operating income -[Average asset *Minimum return]

          = 438900 - [1118331.5*.35]

        = 438900 - 391416.03

       = $ 47483.98 [rounded to 47484]

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