Return on Investment and Residual Income Johnson Company has two sources of funds: long-term debt and equity capital. Johnson Company has profit centers in the following locations with the following net incomes and total assets: Net Income Assets Las Vegas $760,000 $4,000,000 Dallas 1,000,000 8,000,000 Tampa 1,840,000 12,000,000 a. Calculate ROI for each profit center and rank them from highest to lowest based on ROI. Round ROI to the nearest whole percentage. ROI Rank Las Vegas Answer Answer Dallas Answer Answer Tampa Answer Answer b. Calculate residual income for each profit center based on a desired ROI of 5% and rank them from highest to lowest based on residual income. ROI Rank Las Vegas Answer Answer Dallas Answer Answer Tampa Answer Answer
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Johnson Company has two sources of funds: long-term debt and equity capital. Johnson Company has profit centers in the following locations with the following net incomes and total assets:
| Net Income | Assets | ||
|---|---|---|---|
| Las Vegas | $760,000 | $4,000,000 | |
| Dallas | 1,000,000 | 8,000,000 | |
| Tampa | 1,840,000 | 12,000,000 |
a. Calculate ROI for each profit center and rank them from highest to lowest based on ROI.
Round ROI to the nearest whole percentage.
| ROI | Rank | |
|---|---|---|
| Las Vegas | Answer
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Answer
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| Dallas | Answer
|
Answer
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| Tampa | Answer
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Answer
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b. Calculate residual income for each profit center based on a desired ROI of 5% and rank them from highest to lowest based on residual income.
| ROI | Rank | |
|---|---|---|
| Las Vegas | Answer
|
Answer
|
| Dallas | Answer
|
Answer
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| Tampa | Answer
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Answer
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