Question

Need formula and explanation

5 Data 6 Sales $25,000,000 7 Net operating income $3,000,000 8 Average operating assets $10,000,000 9 Minimum required rate of return 25% 10 11 Enter a formula into each of the cells marked with a ? below 12 Review Problem: Return on Investment (ROI) and Residual Income 13 14 Compute the ROI 15 Margin 16 Turnover 17 ROI 18 19 Compute the residual income 20 Average operating assets 21 Net operating income 22 Minimum required return 23 Residual income 26 27 Notes: 29 1) Calculate ROI based on the Data above first. What is it? 33 2) Change the Average Operating Assets to $8,000,000 and comment 34 below on the change in ROI with the lower operating assets. 35 Any change in Residual Income? 37 38 3) Now change Sales to $15,000,000 with other Data presented in Note 1 as shown above. 39 You may copy the formula and show the results. 40 Any change in Residual Income? 41 42

Answer 1

Data
Sales	25000000
Net Operating Income	3000000
Average Operating Assets	10000000
Minimum required rate of return	25%
Compute the ROI
Margin	12%	=B7/B6
Turnover	2.5	=B6/B8
ROI	30%	=B7/B8
Compute the residual income
Average Operating Assets	10000000	=B8
Net Operating Income	3000000	=B7
Minimum required rate of return	25%	=B9
Residual Income	500000	=B21-B20*B22

Margin = Net Operating Income / Sales x 100
Turnover = Sales / Net Operating Income
ROI = Net Operating Income / Average Operating Assets x 100

Residual Income = Net Operating Income - Average Operating Assets x Minimum Required rate of return

1.
ROI = 30%
ROI is Net Operating income earned for Average Operating Assets employed.

2.
Since the Average Operating assets are lowered, therefore ROI increased as net operating income is associated with lower operating assets.

Data
Sales	25000000
Net Operating Income	3000000
Average Operating Assets	8000000
Minimum required rate of return	25%
Compute the ROI
Margin	12%	=B7/B6
Turnover	3.125	=B6/B8
ROI	37.50%	=B7/B8
Compute the residual income
Average Operating Assets	8000000	=B8
Net Operating Income	3000000	=B7
Minimum required rate of return	25%	=B9
Residual Income	1000000	=B21-B20*B22

Residual Income increased by 500000, since ROI increased

3.

Data
Sales	25000000
Net Operating Income	3000000
Average Operating Assets	15000000
Minimum required rate of return	25%
Compute the ROI
Margin	12%	=B7/B6
Turnover	1.666667	=B6/B8
ROI	20.00%	=B7/B8
Compute the residual income
Average Operating Assets	15000000	=B8
Net Operating Income	3000000	=B7
Minimum required rate of return	25%	=B9
Residual Income	-750000	=B21-B20*B22

Residual Income decreased by 1250000