Question

s. There are three unrelated companies, Cole Company, LaChut Industries, and Gable, Inc. (1) (4 points) Write down the formulae, respectively, for Sales margin, Capital turnover, RO, and Residual Income. Answer: (2) (11 points) Fill in the missing numbers in the preceding table. (Round your answers to two decimal places if needed) Cole Company LaChut Industries Gable, Inc. $ 522,000 $108,000 Sales $ 110,600 $ 43,200 Operating income 180,000 $ 72,000 Total assets 10% 14% Sales margin 4.001076 Capital turnover 29% Return on investment (ROI) Target rate of return 9% $21,600 $ 69,125 Residual income (RI)

Answer 1

Answer 1.

Sales Margin = Operating Income / Sales

Capital Turnover = Sales / Total Assets

Return on Investment = Operating Income / Total Assets

Residual Income = Operating Income - Target Rate of Return * Total Assets

Answer 2.

Cole Company:

Sales Margin = Operating Income / Sales
Sales Margin = $43,200 / $108,000
Sales Margin = 40%

Capital Turnover = Sales / Total Assets
Capital Turnover = $108,000 / $72,000
Capital Turnover = 1.50

Return on Investment = Operating Income / Total Assets
Return on Investment = $43,200 / $72,000
Return on Investment = 60%

Residual Income = Operating Income - Target Rate of Return * Total Assets
Residual Income = $43,200 - 9% * $72,000
Residual Income = $36,720

LaChut Industries:

Sales Margin = Operating Income / Sales
0.14 = $110,600 / Sales
Sales = $790,000

Capital Turnover = Sales / Total Assets
4.00 = $790,000 / Total Assets
Total Assets = $197,500

Return on Investment = Operating Income / Total Assets
Return on Investment = $110,600 / $197,500
Return on Investment = 56%

Residual Income = Operating Income - Target Rate of Return * Total Assets
$69,125 = $110,600 - Target Rate of Return * $197,500
Target Rate of Return * $197,500 = $41,475
Target Rate of Return = 21%

Gable, Inc.:

Sales Margin = Operating Income / Sales
0.10 = Operating Income / $522,000
Operating Income = $52,200

Capital Turnover = Sales / Total Assets
Capital Turnover = $522,000 / $180,000
Capital Turnover = 2.90

Residual Income = Operating Income - Target Rate of Return * Total Assets
$21,600 = $52,200 - Target Rate of Return * $180,000
Target Rate of Return * $180,000 = $30,600
Target Rate of Return = 17%