Question

Exercise 11-9 Return on Investment (ROI) and Residual Income Relations (LO11-1, LO11-2] A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector E industry. Supply the missing data in the table below: (Loss amounts should be indicated by a minus sign. Round your percentage answers to nearest whole percent and other amounts to whole dollars.) A C 540,000 $ 410,000 $ $ $ Sales Net operating income Average operating assets Return on investment (ROI) . Minimum required rate of return: Company B 740,000 41,000 1 - 17% $ $ 159,000 166,000 24% Percentage 14% 13 % /0 Dollar amount $ 59,000 Residual income $ 7,000

Answer 1

Ans.		Company
		A	B	C
	Sales	$410,000	$740,000	$540,000
	Net operating income	$39,840	$41,000	$27,670
	Average operating assets	$166,000	$241,176	$159,000
	Return on investment	24.0%	17%	17%
	Minimum required rate of return:
	Percentage	14%	24%	13%
	Dollar amount	$23,240	$59,000	$20,670
	Residual income	$16,600	-$18,000	$7,000
	*Calculations for Company A:
	Net operating income = Average operating assets * 24%
	$166,000 * 24%
	$39,840
	Minimum required return (dollar amount) = Average operating assets * Minimum required percentage
	$166,000 * 14%
	$23,240
	Residual income = Net operating income - Minimum required return (dollar amount)
	$39,840 - $23,240
	$16,600
	*Calculations for Company B:
	Average operating assets = Net operating income / Return on investment
	$41,000 / 17%
	$241,176
	Minimum required return (dollar amount) = Average operating assets * Minimum required percentage
	$59,000 = $241,176 * Minimum required percentage
	Minimum required percentage =   $59,000 / $241,176
	24%
	Residual income = Net operating income - Minimum required return (dollar amount)
	$41,000 - $59,000
	-$18,000
	*Calculations for Company C:
	Minimum required return (dollar amount) = Average operating assets * Minimum required percentage
	$159,000 * 13%
	$20,670
	Net operating income   =   Minimum required return (dollar amount) + Residual income
	$20,670 + $7,000
	$27,670
	*Return on investment = Net operating income / Average operating assets
	$27,670 / $159,000 * 100
	17%