Consider the data for each of the following four independent companies:
Required:
- 1. Calculate the missing values in the above table. (Round rates to four significant digits.)
- 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.
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:
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.
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.
Calculate the missing amounts in the given table:
Particulars | A | B | C | D | ||||
Revenue | $10,000 | $48,000 | $96,000 | $19,200 | k | |||
Expenses | $8,000 | $36,000 | d | $90,000 | $18,000 | l | ||
Operating income | $2,000 | $12,000 | $6,000 | g | $1,200 | m | ||
Assets | $40,000 | $96,000 | e | $48,000 | $9,600 | |||
Margin | 20% | a | 25% | 6.25% | h | 6.25% | ||
Turnover | 0.25 | b | 0.50 | 2.00 | i | 2.00 | ||
ROI | 5.00% | c | 12.5% | f | 12.50% | j | 12.50% | n |
Table (1)
Notes to the above table:
a) Calculate margin for A:
b) Calculate the turnover for A:
c) Calculate the ROI for A:
d) Calculate the expenses for B:
e) Calculate the assets for B:
f) Calculate the ROI for B:
g) Calculate the operating income for C:
h) Calculate margin for C:
i) Calculate the turnover for C:
j) Calculate the ROI for C:
k) Calculate the Revenue for D:
m) Compute the Operating income for D:
l) Compute the expenses for D:
n) Compute the ROI for D:
2.
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 for Firm A:
Therefore, residual income of Firm A is ($1,600).
Residual income for Firm B:
Therefore, residual income of Firm B is $3,360.
Residual income for Firm C:
Therefore, residual income of Firm C is $1,680.
Residual income for Firm D:
Therefore, residual income of Firm D is $336.
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Chapter 10 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- One item is omitted from each of the following computations of the return on investment: Return on Investment = Profit Margin × Investment Turnover 18% = 10% × (a) (b) = 28% × 0.75 24% = (c) × 1.5 10% = 20% × (d) (e) = 15% × 2.2 Determine the missing items identified by the letters as shown above. If required, round your answers to two decimal places. Item Answer (a) fill in the blank 1 (b) fill in the blank 2% (c) fill in the blank 3% (d) fill in the blank 4 (e) fill in the blank 5%arrow_forwardCalculate the missing values for each unique company. (Enter your ROI and Profit Margin percentage answers to one decimal place, (1.e., 0.123 should be entered as 12.3%). Round your Investment Turnover answers to 2 decimal places.) Profit Investment Turnover ROI Margin 8.8 % Company 1 Company 2 Company 3 Company 4 3.00 20.0 % 5.00 22.0 % 11.0 % 13.0 % 3.00arrow_forwardBriggs Company has operating income of $45,760, invested assets of $143,000, and sales of $457,600. Use the DuPont formula to compute the return on investment. If required, round your answers to two decimal places. a. Profit margin % b. Investment turnover c. Return on investment %arrow_forward
- Margin, Turnover, ROI Required: 1. Consider the data for each of the following four independent companies. Calculate the missing values in the table below. For margin and ROI, enter your answers as percentages, rounded to two decimal places. For example, the decimal value .03827 would be entered as "3.83" percent. For turnover, enter your answer as a decimal value rounded to two decimal places. A Revenue $12,500 B $49,000 C D $96,000 Expenses $10,000 $90,240 $ Operating income $2,500 $14,700 Assets $50,000 $48,000 $9,500 Margin % 30% % 6.00% Turnover 0.50 2.00 ROI % % % % 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. If the residual income is negative, enter a negative amount. A's residual income B's residual income C's residual income D's residual incomearrow_forwardHelp with the chart belowarrow_forwardComparative data on three companies operating in the same industry follow. The minimum required ROI is 10% for all three companies. Determine the missing amounts. (Round asset turnover of Company B and return on investment of Company C to 1 decimal place, e.g. 15.2 or 15.2% and all other answers to O decimal places, e.g. 152. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Sales Net operating income Average operating assets Profit (d) margin Assets turnover Return on (h) investment Residual (j) $ income Company A $1,578,000 $205,140 $789,000 % (e) % $ (k) $ Company B Company C $692,500 (a) $ (b) $131,575 % 1.9 % (i) A (1) $ $4,808,000 0.5 % 3 %arrow_forward
- Comparative data on three companies operating in the same industry follow. The minimum required ROI is 10% for all three companies. Determine the missing amounts. (Round asset turnover of Company B and return on investment of Company C to 1 decimal place, e.g. 15.2 or 15.2% and all other answers to O decimal places, e.g. 152. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Sales Net operating income Average operating assets Profit margin Assets turnover Return on investment Residual income (d) (f) (h) (j) $ Company A $1,560,000 $187,200 $780,000 (c) % (e) % gra LA (k) $ Company B $767,300 $161,133 1 % (a) $ (b) 2.1 % (i) tA (1) $ Company C GA $4,637,000 0.6 % 4 %arrow_forwardOne item is omitted from each of the following computations of the return on investment: Rate of Return on Investment = Profit Margin x Investment Turnover 17 % = 10 % x (a) (b) = 28 % x 0.75 18 % = (c) x 1.5 10 % = 20 % x (d) (e) = 15 % x 1.2 Determine the missing items identified by the letters as shown above. If required, round your answers to two decimal places. (a) fill in the blank (b) fill in the blank % (c) fill in the blank % (d) fill in the blank (e) fill in the blank %arrow_forwardThe Bottlebrush Division has income from operations of $90,300, invested assets of $258,000, and sales of $903,000. Use the DuPont formula to compute the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round answers to one decimal place. a. Profit Margin % b. Investment Turnover c. Return on Investment %arrow_forward
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- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub