Question

Return on Investment and Residual income Johnson Company has two sources of funds: long-term debt and equity capital. Johnson Company has profit centers in the following locations with the following net incomes and total assets: Las Vegas 5710,000 $4,000,000 950,000 3.000.000 1,790,000 12,000,000 Tampa a. Calculate ROI for each profit center and rank them from highest to lowest based on ROL Round Rol to the nearest whole percentage SVS Dallas b. Calculate residual income for each profit center based on a desired ROI of 5% and rank them from here to lowest based on residual income. Las Vegas Dalas Tampa

Answer 1

1. return on investment :

net income / assets *100

	net income	assets	ROI	rank
Las vegas	7,10,000	4,000,000	17.75%	1.
Daltas	9,50,000	8,000,000	11.87%	3.
Tampa	1,790,000	12,000,000	14.92%	2.

as per ROI the highest is 17.75% las vegas is highest Return on investment.....

2. Residual income :

Residual income = operating income -( operating assets * target rate of return)

lasvegas= 7,10,000-(4,000,000*5%) = 7,10,000-2,00,000=5,10,000

dalts = 9,50,000-( 8,000,000*5%) = 9,50,000-4,00,000=5,50,000

tampa = 1,790,000- (12,000,000*5%) =1,790,000-6,00,000=1,190,000

residual income	rank (highest to lowest)
5,10,000	3
5,50,000	2
1,190,000	1

as per residual income tampa is highest....