Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 10, Problem 17E

Consider the data for each of the following four independent companies:

Chapter 10, Problem 17E, Consider the data for each of the following four independent companies: Required: 1. Calculate the

Required:

  1. 1. Calculate the missing values in the above table. (Round rates to four significant digits.)
  2. 2. Assume that the cost of capital is 9 percent for each of the four firms. Compute the residual income for each of the four firms.

1.

Expert Solution
Check Mark
To determine

Calculate the missing amounts in the given table.

Explanation of Solution

Margin: It is an amount income generated by a dollar of sales. It is calculated as follows:

Margin=Operating IncomeSales

Turnover: It is an amount of sales generate by average operating assets. It is calculated by dividing the sales by the average operating assets in the assets, required to generate those sales.

Turnover = SalesAverage Operating 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.

ROI = OperatingIncomeAverageTotalAssets

Calculate the missing amounts in the given table:

ParticularsA B C D 
Revenue$10,000 $48,000 $96,000 $19,200k
Expenses $8,000 $36,000d$90,000 $18,000l
Operating income$2,000 $12,000 $6,000g$1,200m
Assets$40,000 $96,000e$48,000 $9,600 
Margin20%a25% 6.25%h6.25% 
Turnover0.25b0.50 2.00i2.00 
ROI5.00%c12.5%f12.50%j12.50%n

Table (1)

Notes to the above table:

a) Calculate margin for A:

Margin=Operating IncomeSales=$2,000$10,000=0.20or 20%

b) Calculate the turnover for A:

Turnover = SalesAverage Operating Assets=$10,000$40,000=0.25

c) Calculate the ROI for A:

ROI = OperatingIncomeAverageTotalAssets=$2,000$40,000=0.05 or 5%

d) Calculate the expenses for B:

RevenuesExpenses=Operating Income$48,000Expenses=$12,000$48,000$12,000=ExpensesExpenses = $36,000

e) Calculate the assets for B:

Turnover = SalesAverage Operating Assets0.50=$48,000Average Operating AssetsAverage Operating Assets=$48,0000.50Average Operating Assets=$96,000

f) Calculate the ROI for B:

ROI = OperatingIncomeAverageTotalAssets=$12,000$96,000=0.125 or 12.5%

g) Calculate the operating income for C:

RevenuesExpenses=Operating Income$96,000$90,000=Operating IncomeOperating Income=$6,000

h) Calculate margin for C:

Margin=Operating IncomeSales=$6,000$96,000=0.0625or 6.25%

i) Calculate the turnover for C:

Turnover = SalesAverage Operating Assets=$96,000$48,000=2

j) Calculate the ROI for C:

ROI = OperatingIncomeAverageTotalAssets=$6,000$48,000=0.125 or 12.5%

k) Calculate the Revenue for D:

Turnover = SalesAverage Operating Assets2.00=Sales (Revenue)$9,600Sales (Revenue)=2.00×$9,600Sales (Revenue)=$19,200

m) Compute the Operating income for D:

Margin=Operating IncomeSales6.25%=Operating Income$19,200Operating Income=6.25%×$19,200Operating Income=$1,200

l) Compute the expenses for D:

RevenuesExpenses=Operating Income$19,200Expenses=$1,200$19,200$1,200=ExpensesExpenses = $18,000

n) Compute the ROI for D:

ROI = OperatingIncomeAverageTotalAssets=$1,200$9,600=0.125 or 12.5%

2.

Expert Solution
Check Mark
To determine

Calculate the residual income for each of the four firms.

Explanation of Solution

Residual income: It is an amount by which an operating income (earnings) exceeds a minimum acceptable return on the average capital invested.

Residual income=Operating earnings(Minimum acceptable return×Invested capital)

Residual income for Firm A:

Residual income=Operating earnings(Minimum acceptable return×Invested capital)=$2,000(9%×$40,000)=$2,000$3,600=($1,600)

Therefore, residual income of Firm A is ($1,600).

Residual income for Firm B:

Residual income=Operating earnings(Minimum acceptable return×Invested capital)=$12,000(9%×$96,000)=$12,000$8,640=$3,360

Therefore, residual income of Firm B is $3,360.

Residual income for Firm C:

Residual income=Operating earnings(Minimum acceptable return×Invested capital)=$6,000(9%×$48,000)=$6,000$4,320=$1,680

Therefore, residual income of Firm C is $1,680.

Residual income for Firm D:

Residual income=Operating earnings(Minimum acceptable return×Invested capital)=$1,200(9%×$9,600)=$1,200$864=$336

Therefore, residual income of Firm D is $336.

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Chapter 10 Solutions

Cornerstones of Cost Management (Cornerstones Series)

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