Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc Balance Sheet Beginning Ending Balance Balance Assets Cash 129,000 330,000 562,000 839,000 127,000 Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A Land (undeveloped) 474,000 487,000 812,000 410,000 249,000 430,000 247,000 $2,519,000 $ 2,577,000 Total assets Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity 383,000 338,000 954,000 1,285,000 $ 2,577,000 954,000 1,182,000 $ 2,519,000 Total liabilities and stockholders' equity Joel de Paris, Inc Income Statement $ 4,324,000 Sales Operating expenses 3,675,400 Net operating income Interest and taxes: 648,600 $ 115,000 190,000 Interest expense Tax expense 305,000 343,600 Net income

2.

Answer 1

1
Beginning Operating assets	1860000	=2519000-410000-249000
Ending Operating assets	1900000	=2577000-430000-247000
Average Operating assets	1880000	=(1860000+1900000)/2
2
Margin = Net operating income/Sales
Turnover = Sales/Average Operating assets
ROI = Margin*Turnover
Margin	15.00%	=648600/4324000
Turnover	2.30	=4324000/1880000
ROI	34.50%	=15%*2.3
3
Net operating income	648600
Less: Minimum required return	282000	=1880000*15%
Residual Income	366600

Question-2

Net product line net operating income = 9396500*(1-65%)-2564875= $723900
Margin = Net operating income/Sales
Turnover = Sales/Operating assets
ROI = Margin*Turnover
	Present	New line	Total
Sales	21810000	9396500	31206500
Net operating income	2028800	723900	2752700
Operating assets	4363000	2350000	6713000
Margin	9.30%	7.70%	8.82%
Turnover	5.00	4.00	4.65
ROI	46.50%	30.80%	41.01%
1
ROI for this year = 46.50%
2
ROI for new product line by itself = 30.80%
3
ROI for next year = 41.01%
4
Reject, as ROI decreases
5
Adding the new product line would increase company's overall ROI
6
	Present	New line	Total
Operating assets	4363000	2350000	6713000
Minimum required return	15%	15%	15%
Minimum Net operating income	654450	352500	1006950
Actual Net operating income	2028800	723900	2752700
Minimum Net operating income	654450	352500	1006950
Residual income	1374350	371400	1745750
a
Residual income for this year = $1374350
b
Residual income for new product line =$371400
c
Residual income for next year = $1745750
d
Accept, as residual income increases