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.
Want to see more full solutions like this?
Chapter 10 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages to one decimal place and the investment turnover to two decimal places.arrow_forwardOne 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_forwardRalston Company has operating income of $75,000, invested assets of $360,000, and sales of $790,000. Use the DuPont formula to compute the return on investment (ROI), and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round the profit margin percentage to two decimal places, the investment turnover to three decimal places, and the return on investment to two decimal places.arrow_forward
- Calculate 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_forward14. Briggs Company has operating income of $33,516, invested assets of $133,000, and sales of $478,800. 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_forwardBottlebrush Company has operating income of $150,720, invested assets of $314,000, and sales of $1,004,800. 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.arrow_forward
- Return on investment is often expressed as follows: ROI = Controllable margin Average operating assets Controllable margin Sales Sales Average operating assets (b1) 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 Company A Company B $1,382,000 $700,400 $165.840 $133,076 (b) $ $691.000 (c) $ (d) % (e) % Return on investment (h) Residual income S k) $ () $ Company C $4,845,000 0.5 %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_forwardB. Calculate the profit margin, return on investment, and residual income. Assume an investment base of $100,000 and 6% cost of capital. Round your percentage answers to one decimal place. Profit margin Return on investment Residual income 2.20 a ✓ % 4.2 ✓ % C. Which of the following statements is correct? Uncontrollable costs are included in the income statement because a. these costs ultimately affect each division. b. these costs are the responsibility of each division manager. c. these costs are non-recurring. d. these costs are head office's responsibility.arrow_forward
- Spelman Corporation has Sales of $36,800, Depreciation Expense of $3,000, Interest Expense of $2,000, Cost of Goods Sold of $15,000, other costs of $7,800, and an average tax rate of 34 percent. What is the firm's profit margin? Please record your answer using the following format (12.54). Record your answer to two decimal places. While the answer should be given as a percentage, do NOT place a "%" directly after the number. Do not type the parentheses: just type the number!arrow_forwardThe Bottlebrush Company has income from operations of $48,312, invested assets of $122,000, and sales of $536,800. Round answers to one decimal place. (a) Determine the profit margin. % (b) Determine investment turnover. (c) Use the DuPont formula to determined the rate of return on investment.arrow_forwardReturn on investment is often expressed as follows: ROI Controllable margin Average operating assets Controllable margin Sales X Sales Average operating assets (b1) 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 0 decimal places, e.g. 152. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Company A Company B Company C Sales $1,580,000 $725,800 (a) $ Net operating income $173,800 $152,418 (b) $ Average operating assets $790,000 (c) $ (d) % (e) % Profit margin (f) (g) Assets turnover Return on investment (h) % 2.1 % (1) $ (k) $ (1) $ Residual income $5,387,000 0.6 % 5 %arrow_forward
- 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