Chapter 11, Problem 1TF15

1.

To determine

Last year’s margin

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Last year’s margin is 20%

Explanation of Solution

Computation of margin

  $\begin{array}{l}M\arg in=\frac{Netoperatingincome}{Sales}\times 100\\ M\arg in=\frac{240,000}{1,200,000}\times 100\\ M\arg in=20\%\end{array}$

2.

To determine

Last year’s turnover

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Last year’s turnover is 1.6

Explanation of Solution

Computation of turnover

  $\begin{array}{l}Turnover=\frac{Sales}{Netoperatingincome}\times 100\\ Turnover=\frac{1,200,000}{625,000}\times 100\\ Turnover=\text{ 1}\text{.6}\end{array}$

3.

To determine

Last year’s return on investment (ROI)

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Last year’s return on investments is 40%

Explanation of Solution

Computation of return on investment

  $\begin{array}{l}\mathrm{Re}turnonInvestment=\text{}M\arg in\times Turnover\\ \mathrm{Re}turnonInvestment=20\%\times 1.6\\ \mathrm{Re}turnonInvestment=32\%\end{array}$

4.

To determine

Margin related to this year’s investment opportunity

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Margin related to this year’s related to this year’s investment opportunity is 15%

Explanation of Solution

Computation of margin

  $\begin{array}{l}M\arg in=\frac{Netincome}{Sales}\times 100\\ M\arg in=\frac{30,000}{200,000}\times 100\\ M\arg in=15\%\end{array}$

Working notes:

Compute the net operating income

Particulars	Amount
Sales	$200,000
Less: Variable expenses   $\left(\$200,000-\$120,000\right)$	$80,000
Contribution margin   $\left(60\%\times \$200,000\right)$	$120,000
Less: Fixed expenses	$90,000
Net operating income	$30,000

5.

To determine

The turnover related to this year’s investment opportunity.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

The turnover related to this year’s investment opportunity is 1.67

Explanation of Solution

Computation of current year turnover

  $\begin{array}{l}Currentyearturnover=\frac{Sales}{Turnover}\\ Currentyearturnover=\frac{\$200,000}{\$120,000}\\ Currentyearturnover=1.67\end{array}$

6.

To determine

The ROI related to this year’s investment opportunity.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

The ROI related to this year’s investment opportunity is 25%.

Explanation of Solution

Computation of return on investment

  $\begin{array}{l}\mathrm{Re}turnoninvestment=\left(M\arg in\times Turnover\right)\\ \mathrm{Re}turnoninvestment=15\%\times 1.67\\ \mathrm{Re}turnoninvestment=25\%\end{array}$

7.

To determine

If company purses the investment opportunity and otherwise performs the same as last year, give the margin it will earn this year.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

If company purses the investment opportunity and otherwise performs the same as last year, the margin it will earn this year is 19.2%.

Explanation of Solution

Current year margin

  $\begin{array}{l}Currentyearm\arg in=\frac{Netoperatingincome}{Sales}\\ Currentyearm\arg in=\frac{\$230,000}{\$1,200,000}\\ Currentyearm\arg in=19.2\%\end{array}$

8.

To determine

If company purses the investment opportunity and otherwise performs the same as last year, give the turnover it will earn this year.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

If company purses the investment opportunity and otherwise performs the same as last year, the turnover it will earn this year is 1.61.

Explanation of Solution

Computation of current year turnover

  $\begin{array}{l}Currentyearturnover=\frac{Netoperatingincome}{Sales}\\ Currentyearturnover=\frac{\$1,200,000}{\$745,000}\\ Currentyearturnover=1.61\end{array}$

9.

To determine

If company purses the investment opportunity and otherwise performs the same as last year, give the ROI it will earn this year.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

If company purses the investment opportunity and otherwise performs the same as last year, the ROI it will earn this year is 30.9%.

Explanation of Solution

Computation of return on investment

  $\begin{array}{l}\mathrm{Re}turnoninvestment=\left(M\arg in\times Turnover\right)\\ \mathrm{Re}turnoninvestment=19.2\%\times 1.61\\ \mathrm{Re}turnoninvestment=30.9\%\end{array}$

10.

To determine

Bonus is earned only when the ROI of current year exceeds from last year. Whether she will pursue the investment opportunity and will owner of the company allow pursuing the investments company.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

If the return on investment is rejected then CEO of the company should provide preference to the new investment.

Explanation of Solution

Due to previous return on investment is 32% and with the new investment is 30.9%, so this new investment opportunity is not preferred. The company actually requires 15% return on investments but in normal the return on investment is 25%.

If the return on investment is rejected then CEO of the company should provide preference to the new investment.

11.

To determine

Last year’s residual income.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Last year’s residual income is $106,205

Explanation of Solution

Computation of last year residual income

  $\begin{array}{l}Lastyearresidualincome=\left(\begin{array}{l}Netoperattingincome-\\ \left(\begin{array}{l}Averageoperatingassets\times \\ \mathrm{Re}turnoninvestment\end{array}\right)\end{array}\right)\\ Lastyearresidualincome=(\$200,000-\left(\$625,000\times 15\%\right))\\ Lastyearresidualincome=\$106,250\end{array}$

12.

To determine

Residual income of this year’s investment opportunity.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Residual income of this year’s investment opportunity will be $12,000

Explanation of Solution

Computation of current year residual income

  $\begin{array}{l}Currentyearresidualincome=\left(\begin{array}{l}Netoperattingincome-\\ \left(\begin{array}{l}Averageoperatingassets\times \\ \mathrm{Re}turnoninvestment\end{array}\right)\end{array}\right)\\ Currentyearresidualincome=(30,000-\left(\$120,000\times 15\%\right))\\ Currentyearresidualincome=\$12,000\end{array}$

13.

To determine

If the company pursues the investments opportunity and otherwise performs the same, explain the residual income it will earn this year.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

If the company pursues the investments opportunity and otherwise performs the same, the residual income it will earn this year is $118,250.

Explanation of Solution

Computation of current year residual income

  $\begin{array}{l}Currentyearresidualincome=\left(\begin{array}{l}Netoperattingincome-\\ \left(\begin{array}{l}Averageoperatingassets\times \\ \mathrm{Re}turnoninvestment\end{array}\right)\end{array}\right)\\ Currentyearresidualincome=(\$230,000-\left(\$745,000\times 15\%\right))\\ Currentyearresidualincome=\$118,250\end{array}$

14.

To determine

Bonus is earned only when the ROI of current year exceeds from last year, whether she will pursue the investment opportunity.

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

Management will pursue for achieving the investment opportunity as it helps in increasing the residual income by $12,000.

Explanation of Solution

Bonus is earned only when the ROI of current year exceeds from last year. It will be pursued for achieving the investment opportunity as it helps in increasing the residual income by $12,000.

15.

To determine

If contribution margin ratio of investment opportunity was 50% instead of 60% and bonus is earned only when the ROI of current year exceeds from last year. Whether she will pursue the investment opportunity and will owner of the company want to pursue the investments company

Introduction: Return on investments is difference between cost of investment and net profit. It is also performance measure which evaluates the efficiency of the investment made. It is even used in comparing the efficiency of difference between investments.

Answer to Problem 1TF15

The difference in residual income for current year is of $8,000.

Explanation of Solution

Difference in residual income

  $\begin{array}{l}Differenceinresidualincome=\left(\begin{array}{l}Lastyearincome-\\ Currentyearresidualincome\end{array}\right)\\ Differenceinresidualincome=\$106,250-\$98,250\\ Differenceinresidualincome=\$8,000\end{array}$

Working notes:

Residual income

  $\begin{array}{l}\mathrm{Re}sidualincome=\left(\begin{array}{l}Netoperatingincome-\\ \left(\begin{array}{l}Averageoperatingassets\times \\ \mathrm{Re}turnoninvestment\end{array}\right)\end{array}\right)\\ \mathrm{Re}sidualincome=(\$210,000-(\$745,000\times 15\%))\\ \mathrm{Re}sidualincome=\$98,250\end{array}$

Compute net operating income.

Particulars	Amount
Sales	$200,000
Less: Variable expenses   $\left(\$200,000-\$100,000\right)$	$100,000
Contribution margin   $\left(50\%\times \$200,000\right)$	$100,000
Less: Fixed expenses	$90,000
Net operating income	$10,000