Question

Coolbrook Company has the following information available for the past year:   

	River Division			Stream Division
Sales revenue	$	1,206,000		$	1,808,000
Cost of goods sold and operating expenses		898,000			1,297,000
Net operating income	$	308,000		$	511,000
Average invested assets	$	1,150,000		$	1,460,000

   

The company’s hurdle rate is 6.01 percent.

Required:

1. Calculate return on investment (ROI) and residual income for each division for last year.

2. Recalculate ROI and residual income for the division for each independent situation that follows:

a. Operating income increases by 11 percent.

b. Operating income decreases by 10 percent.

c. The company invests $258,000 in each division, an amount that generates $106,000 additional income per division.

d. Coolbrook changes its hurdle rate to 4.01 percent.

Answer 1

1		River Division	Stream Division
	Net Sales Revenue	$12,06,000	$18,08,000
	Cost of goods sold and operating expenses	$8,98,000	$12,97,000
	Net Operating Income	$3,08,000	$5,11,000
	Average Invested Assets	$11,50,000	$14,60,000
	ROI =Net Operating Income / Average Total Assets	27%	35%
	Residual income of last year =Net operating income -(Average Invested assets*6.01%)	$2,38,885.00	$4,23,254.00
2.a		River Division	Stream Division
	Net Sales Revenue	$12,06,000	$18,08,000
	Cost of goods sold and operating expenses	$8,98,000	$12,97,000
	Net Operating Income	$3,41,880	$5,67,210
	Average Invested Assets	$11,50,000	$14,60,000
	ROI =Net Operating Income / Average Total Assets	30%	39%
	Residual income of last year =Net operating income -(Average Invested assets*6.01%)	$2,72,765.00	$4,79,464.00
2.b		River Division	Stream Division
	Net Sales Revenue	$12,06,000	$18,08,000
	Cost of goods sold and operating expenses	$8,98,000	$12,97,000
	Net Operating Income	$2,77,200	$4,59,900
	Average Invested Assets	$11,50,000	$14,60,000
	ROI =Net Operating Income / Average Total Assets	24%	32%
	Residual income of last year =Net operating income -(Average Invested assets*6.01%)	$2,08,085.00	$3,72,154.00
2.c		River Division	Stream Division
	Net Sales Revenue	$12,06,000	$18,08,000
	Cost of goods sold and operating expenses	$8,98,000	$12,97,000
	Net Operating Income	$4,14,000	$6,17,000
	Average Invested Assets	$14,08,000	$17,18,000
	ROI =Net Operating Income / Average Total Assets	29%	36%
	Residual income of last year =Net operating income -(Average Invested assets*6.01%)	$3,29,379.20	$5,13,748.20
2.d		River Division	Stream Division
	Net Sales Revenue	$12,06,000	$18,08,000
	Cost of goods sold and operating expenses	$8,98,000	$12,97,000
	Net Operating Income	$3,08,000	$5,11,000
	Average Invested Assets	$11,50,000	$14,60,000
	ROI =Net Operating Income / Average Total Assets	27%	35%
	Residual income of last year =Net operating income -(Average Invested assets*4.01%)	$2,61,885.00	$4,52,454.00