Question

Exercise 11-12 Evaluating New Investments Using Return on Investment and Residual Income [LO3, LO4]

Three divisions of Jameson Co. report the following sales and operating data:

Answer 1

1.

	ROI
Fitness Training	15	%
Spa Services	15	%
Athletic Wear	24	%

ROI = Operating Income / Average Operating Assets

Fitness Training : $ 30,000 / $ 200,000 = 15 %

Spa Services : $ 37,500 / $ 250,000 = 15 %

Athletic Wear : $ 24,000 / $ 100,000 = 24 %

2.

	Fitness Training	Spa Services	Athletic Wear
Residual Income	$ 10,000	$ 7,500	$ 14,000

Residual Income = Operating Income - ( Average Operating Assets * Minimum Required Rate of Return )

Fitness Training = $ 30,000 - ( $ 200,000 x 10 % ) = $ 10,000.

Spa Services = $ 37,500 - ( $ 250,000 x 12 % ) = $ 7,500

Athletic Wear = $ 24,000 - ( $ 100,000 x 10 % ) = $ 14,000.

3.a.

Fitness Training	Yes
Spa Services	Yes
Athletic Wear	No

b.

Fitness Training	Yes
Spa Services	Yes
Athletic Wear	Yes