Question

Data for Uberto Company are presented in the following table of rates of return on investment and residual incomes:

Invested Assets		Income from Operations		Return on Investment		Minimum Return		Minimum Acceptable Income from Operations		Residual Income
$810,000		$178,200		(a)		12%		(b)		(c)
$480,000		(d)		(e)		(f)		$57,600		$19,200
$380,000		(g)		14%		(h)		$38,000		(i)
$290,000		$58,000		(j)		12%		(k)		(l)

Determine the missing values, identified by the letters above. For all amounts, round to the nearest whole number.

a.	%
b.	$
c.	$
d.	$
e.	%
f.	%
g.	$
h.	%
i.	$
j.	%
k.	$
l.	$

Answer 1

a. Return on investment = Income from operation / Capital invested

= $178,200 / $810,000

= 0.22 or 22%

b. Minimum acceptable income from operations = Invested assets * Minimum return

= $810,000 * 12%

= $97,200

c. Residual income = Income from operation - minimum income from operation

= $178,200 - $97,200

= $81,000

d. We know that,

Residual income = Income from operation - minimum income from operation

$19,200 = Income from operation - $57,600

Income from operation = $19,200 + $57,600

= $76,800

e. Return on investment = income from operations / capital invested

= $76,800 / $480,000

= 0.16 or 16%

f.

Minimum acceptable income from operations = Invested assets * Minimum return

$57,600 = $480,000 * Minimum return

Minimum return = $57,600 / $480,000

= 0.12 or 12%

g.

Return on investment = Income from operation / Capital invested

14% = Income from operation / $380,000

Income from operation = $380,000 * 14%

= $53,200

h. Minimum return = $38,000 / $380,000

= 0.10 or 10%

I. Residual income = $53,200 - $38,000

= $15,200

j. Return on investment = $58,000 / $290,000

= 0.20 or 20%

K. Minimum operating income = $290,000 * 12%

= $34,800

l. Residual income = $58,000 - $34,800

= $23,200