Question

Problem 10-15 Return on Investment (ROI) and Residual Income [LO10-1, LO10-2]

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	120,000
Accounts receivable		450,000			530,000
Inventory		320,000			380,000
Plant and equipment, net		680,000			620,000
Investment in Buisson, S.A.		250,000			280,000
Land (undeveloped)		180,000			170,000
Total assets	$	2,020,000		$	2,100,000
Liabilities and Stockholders' Equity
Accounts payable	$	360,000		$	310,000
Long-term debt		1,500,000			1,500,000
Stockholders' equity		160,000			290,000
Total liabilities and stockholders' equity	$	2,020,000		$	2,100,000

Joel de Paris, Inc. Income Statement
Sales					$	4,050,000
Operating expenses						3,645,000
Net operating income						405,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	145,000

The company paid dividends of $15,000 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Turnover" to 1 decimal place.)

3. What was the company’s residual income last year?

Answer 1

Average operating assets = [(2,020,000-180,000-250,000)+(2,100,000-170,000-280,000)]/2 = 1,620,000
Margin = Net operating income/Sales = 405,000/4,050,000 = 10% Turnover = Sales/Average operating assets = 4,050,000/1,620,000 = 2.5 ROI = Margin * Turnover = 10*2.5 = 25%
Residual income = Net operating income - required return = 405,000 - (1,620,000*15%) = 162,000