
Concept explainers
(a)
Concept Introduction:
Rate of
The missing items in return on investment and residual income computations.

Answer to Problem 14.16E
The following table represents various
Divisions | Sales | Income from operations | Invested Assets | Return on Investment | Profit Margin | Investment Turnover |
California | | | | | | |
Midwest | | | | | | |
Northwest | | | | | | |
Texas | | | | | | |
Explanation of Solution
California:
Thus, operating income is
Invested turnover is computed as:
Midwest:
Invested asset is computed as:
Return on investment is as:
Northwest:
Invested turnover is computed as:
Texas:
Invested turnover is computed as:
(b)
Concept Introduction:
Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.
The residual income assuming the minimum acceptable rate of return is

Answer to Problem 14.16E
The following table represents various rates of return on investment and residual incomes:
Divisions | Sales | Income from operations | Invested Assets | Minimum rate of return | Minimum income | Residual income |
California | | | | | | |
Midwest | | | | | | |
Northwest | | | | | | |
Texas | | | | | | |
Explanation of Solution
The minimum income is computed by multiplying the invested assets with the minimum rate of return.
As in the above table the minimum income i.e.
The residual income is calculated by computing the difference between income from operations and minimum income.
As in the above table the residual income i.e.
(c)
Concept Introduction:
Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.
The profitable division in term of return on investment and residual income.

Answer to Problem 14.16E
The profitable division in term of return on investment is Texas and residual income is Northwest.
Explanation of Solution
The return on investment is highest in the Texas division in comparison to others. So, it is the most profitable division in terms of return.
The residual income is highest in the Northwest division in comparison to others. So, it is the most profitable division in terms of residual income.
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Chapter 14 Solutions
Survey of Accounting (Accounting I)
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