Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 10, Problem 16E

(a)

To determine

Compute the missing terms.

(a)

Expert Solution
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Explanation of Solution

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

  Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

  Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

  Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.

Formula of residual income:

Income from operationsXXX
Less minimum acceptable income from operations as a percent of invested assetsXXX
Residual income XXX

Table (1)

1)

Compute income from operations.

  Profit margin=Income from operationsSales7%=Income from operations$860,000Income from operations=$860,000×7%=$60,200

2)

Compute invested assets.

  Return on investment = Income from operationsInvested assets17.5%=$60,200Invested assetsInvested assets=$60,20017.5%=$344,000

Note: Refer to missing amount (a) for value of income from operations.

3)

Compute investment turnover.

  Investment turnover=SalesInvested assets=$860,000$344,000=2.5

4)

Compute sales value.

  Profit margin=Income from operationsSales4.5%=$51,300SalesSales=$51,3004.5%=$1,140,000

5)

Compute sales value.

  Investment turnover=SalesInvested assets3.8=$1,140,000Invested assetsInvested assets=$1,140,0003.8=$300,000

Note: Refer to missing amount (d) for value of sales.

6)

Compute ROI.

  Return on investment = Income from operationsInvested assets$51,300$300,000= 0.171 or 17.1%

Note: Refer to missing amount (e) for value of invested assets.

7)

Compute income from operations.

  Return on investment = Income from operationsInvested assets15% = Income from operations$680,000Income from operations= $680,000×15%=$102,000

8)

Compute profit margin.

  Profit margin=Income from operationsSales$102,000$1,020,000= $1,140,000= 0.1 or 10%

Note: Refer to missing amount (g) for value of income from operations.

9)

Compute investment turnover.

  Investment turnover=SalesInvested assets=$1,020,000$680,000=1.5

10)

Compute ROI.

  Return on investment = Income from operationsInvested assets$89,600$560,000= 0.16 or 16%

11)

Compute profit margin.

  Profit margin=Income from operationsSales$89,600$1,120,000= $1,140,000= 0.08 or 8%

12)

Compute investment turnover.

  Investment turnover=SalesInvested assets=$1,120,000$560,000=2.0

(b)

To determine

Ascertain the residual income of for each division

(b)

Expert Solution
Check Mark

Explanation of Solution

1)

Ascertain the residual income of N Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for N Division.

  Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $344,000 × 12%= $41,280

Note: Refer to missing amount (b) of part (a) for value of invested assets.

Step 2: Determine residual income of N Division.

ParticularsAmount ($)
Income from operations$60,200
Less minimum acceptable income from operations as a percent of invested assets41,280
Residual income $18,920

Table (2)

Note: Refer to missing amount (a) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.

2)

Ascertain the residual income of S Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for S Division.

  Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $300,000 × 12%= $36,000

Note: Refer to missing amount (e) of part (a) for value of invested assets.

Step 2: Determine residual income of S Division.

ParticularsAmount ($)
Income from operations$51,300
Less minimum acceptable income from operations as a percent of invested assets36,000
Residual income $15,300

Table (3)

Note: Refer to Step 1 for value and computation of minimum acceptable income.

3)

Ascertain the residual income of E Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for E Division.

  Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $680,000 × 12%= $81,600

Step 2: Determine residual income of E Division.

ParticularsAmount ($)
Income from operations$102,000
Less minimum acceptable income from operations as a percent of invested assets81,600
Residual income $20,400

Table (4)

Note: Refer to missing amount (g) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.

4)

Ascertain the residual income of W Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for W Division.

  Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $560,000 × 12%= $67,200

Step 2: Determine residual income of W Division.

ParticularsAmount ($)
Income from operations$89,600
Less minimum acceptable income from operations as a percent of invested assets67,200
Residual income $22,400

Table (5)

Note: Refer to missing amount (g) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.

(c) 1

To determine

Ascertain the profitable division in terms of ROI.

(c) 1

Expert Solution
Check Mark

Explanation of Solution

The division with highest return on investment is considered as the most profitable division. Hence, N Division is the most profitable division with highest ROI of 17.5%.

(c) 2

To determine

Ascertain the division with highest residual income

(c) 2

Expert Solution
Check Mark

Explanation of Solution

The division with highest residual income is considered as the most profitable division. Hence, W Division is the most profitable division with the highest residual income of $22,400.

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Chapter 10 Solutions

Managerial Accounting

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