Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Ending Balance Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance sheet Beginning Balance Assets Cash $ 125,000 Accounts receivable 339,000 Inventory 570,000 Plant and equipment, net 826,000 Investment in Buisson, S.A. 398,000 Land (undeveloped) 250,000 Total assets $ 2,508,000 Liabilities and stockholders' Equity Accounts payable $ 371,000 Long-term debt 976,000 Stockholders' equity 1,161,000 Total liabilities and stockholders' equity $ 2,508,000 $ 131,000 474,000 483,000 812,000 433,000 250,000 $ 2,583,000 $ 347,000 976,000 1,260,000 $ 2,583,000 Joel de Paris, Inc. Income statement Sales Operating expenses Net operating income Interest and taxes: Interest expense $ 113,000 Tax expense 205,000 Net income $ 4,888,000 4, 154, 800 733,200 318,000 415, 200 $

Answer 1

Solution:

Part 1:

Average operating assets = (Beginning balance of operating assets + closing Balance of operating assets) / 2

Operating assets are Cash, Inventory, Accounts receivables, Plant,Property and equipment

Operating Assets	Beginning balance	closing Balance
Cash	125,000	131,000
Accounts receivables	339,000	474,000
Inventory	570,000	483,000
Plant and equipment , net	826,000	812,000
Total	1,860,000	1,900,000

Average operating assets =(1,860,000 + 1,900,000) / 2 = $ 1,880,000

Part 2:

Margin = Net operating Income / sales

= $ 733,200 / $ 4,888,000

= 15%

Turnover = Sales / Average operating assets

= $ 4,888,000 / $ 1,880,000

= 2.6

Return on Investment (ROI) = Margin x Turnover   

= 15% x 2.6       

= 39%

Part 3:

Average operating assets = $ 1,880,000

Minimum required rate of return = 15%

Minimum return = Average operating assets x Minimum required rate of return

= $ 1,880,000 x 15%

= $ 282,000

Net Operating income = $ 733,200

Residual Income = Net Operating income - Minimum return

= $ 733,200 - $ 282,000

= $ 451,200