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Concept Introduction:
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
Or
Profit Margin Ratio:
Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:
Asset Turnover Ratio:
Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:
Residual Income (RI):
Residual Income is the income earned over and above the expected
Requirement-a:
To Calculate:
The missing amounts
Answer to Problem 15.18E
The missing amounts are as follows:
| Division X | Division Y | Division Z | |
| Revenues | $ 1,000,000 | $ 500,000 | $ 1,250,000 |
| Operating Income | $ 120,000 | $ 60,000 | $ 100,000 |
| Operating Assets | $ 500,000 | $ 300,000 | $ 625,000 |
| Margin | 12% | 12% | 8% |
| Turnover | 2 | 1 | 2 |
| ROI | 24% | 20% | 16% |
| Residual income | $ 60,000 | $ 24,000 | $ 25,000 |
Explanation of Solution
The missing amounts are calculated as follows;
| Division X | Division Y | Division Z | |
| Revenues (A) | $ 1,000,000 | $ 500,000 | $ 1,250,000 |
| (500000*1) | (625000*2) | ||
| Operating Income (B) | $ 120,000 | $ 60,000 | $ 100,000 |
| (500000*12%) | |||
| Operating Assets (C) | $ 500,000 | $ 300,000 | $ 625,000 |
| (100000-25000)/12% | |||
| Margin (B/A) | 12% | 12% | 8% |
| Turnover (A/C) | 2 | 1 | 2 |
| ROI (B/C) | 24% | 20% | 16% |
| Residual income (B-C*12%) | $ 60,000 | $ 24,000 | $ 25,000 |
Concept Introduction:
Return on investment (ROI):
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
Or
Profit Margin Ratio:
Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:
Asset Turnover Ratio:
Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:
Residual Income (RI):
Residual Income is the income earned over and above the expected rate of return on assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Residual Income is as follows:
Requirement-b:
To Discuss:
The relative performance of each division
Answer to Problem 15.18E
The relative performance of each division is as follows:
Division X is earning the highest ROI and residual income and Division Z is earning the lowest ROI and residual income.
Explanation of Solution
The relative performance of each division is explained as follows:
| Division X | Division Y | Division Z | |
| Margin | 12% | 12% | 8% |
| Turnover | 2 | 1 | 2 |
| ROI | 24% | 20% | 16% |
| Residual income | $ 60,000 | $ 24,000 | $ 25,000 |
Division X is earning the highest ROI and residual income and Division Z is earning the lowest ROI and residual income.
Concept Introduction:
Return on investment (ROI):
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
Or
Profit Margin Ratio:
Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:
Asset Turnover Ratio:
Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:
Residual Income (RI):
Residual Income is the income earned over and above the expected rate of return on assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Residual Income is as follows:
Requirement-c:
To Discuss:
The importance of the Residual Income In decision making
Answer to Problem 15.18E
Residual income provides the readymade indicator for the comparison to find out the most profitable investment option.
Explanation of Solution
The relative performance of each division is explained as follows:
| Division X | Division Y | Division Z | |
| Margin | 12% | 12% | 8% |
| Turnover | 2 | 1 | 2 |
| ROI | 24% | 20% | 16% |
| Residual income | $ 60,000 | $ 24,000 | $ 25,000 |
Division X is earning the highest ROI and residual income and Division Z is earning the lowest ROI and residual income. Hence, Residual income provides the readymade indicator for the comparison to find out the most profitable investment option.
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Chapter 15 Solutions
Accounting: What the Numbers Mean
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- Following is additional information about transactiona during the year ended May 31, 2020 for Monty Inc., which follows IFRS. Plant assets costing $69,000 were purchased by paying $47,000 in cash and issuing 5,000 common shares. In order to supplement iRs cash, Monty Issued 4,000 additional common shares. Cash dividends of $35,000 were declared and paid at the end of the fiscal year. PRepare a direct Method Cash FLow using the format.arrow_forwardmake a trail balancearrow_forwardOn July 31, 2025, the general ledger of Cullumber Legal Services Inc. showed the following balances: Cash $4,960, Accounts Receivable $1,860, Supplies $620, Equipment $6,200, Accounts Payable $5,080, Common Stock $4,340, and Retained Earnings $4,220. During August, the following transactions occurred. Aug. 3 5 Collected $1,490 of accounts receivable due from customers. Received $1,610 cash for issuing common stock to new investors. 6 Paid $3,350 cash on accounts payable. 7 Performed legal services of $8,060, of which $3,720 was collected in cash and the remainder was due on account. 2 2 2 2 2 12 Purchased additional equipment for $1,490, paying $500 in cash and the balance on account. 14 Paid salaries $4,340, rent $1,120, and advertising expenses $340 for the month of August. 18 20 24 26 27 Collected the balance for the services performed on August 7. Paid cash dividend of $620 to stockholders. Billed a client $1,240 for legal services performed. Received $2,480 from Laurentian Bank;…arrow_forward
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