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 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.) Company A Sales 320,000 S 840,000 $ 620,000 Net operating income Average operating assets $ 45,000 157,000 158,000 Return on investment (ROI) 15 % 20 % Minimum required rate of return 10 % 16 % % Percentage 48,000 Dollar amount 8,000 Residual income

Answer 1

Company A
Net Operating Income = $157000 x 15% = $23550
Minimum Required Return = $157000 x 16% = $25120
Residual Income = $23550 - $25120 = ($1570)

Company B
Average Operating Assets = $45000 / 20% = $225000
Minimum Required Return = $48000 / $225000 x 100 = 21.33%
Residual Income = $45000 - $48000 = ($3000)

Company C
Minimum Required Return = $158000 x 10% = $15800
Net Operating Income = $15800 + $8000 = $23800
Return on Investment = $23800 / $158000 x 100 = 15.06%