Question

Data on three unrelated companies are given in the.following table. EEB (Click the icon to view the table.) Fill in the missing information in the preceding table. (Enter the capital turnover to two decimal places X.XX) Austen Company Plumb Industries 100,000 Sales 40,000 $ 110,600 Operating income $ 80,000 Total assets 40 % Sales margin 14 % 125 4.00 Capital turnover. 50% % Return on investment (ROI) 10% 21 % Target rate of return. 32,000 Residual income 69

Answer 1

Ans.
		Austen Company	Plumb industries	Cleary, Inc.
	Sales	$100,000	$790,000	$490,000
	Operating income	$40,000	$110,600	$39,200
	Total assets	$80,000	$197,500	$196,000
	Sales margin	40%	14%	8%
	Capital turnover	1.25	4.00	2.50
	Return on investment	50%	56%	20%
	Target rate of return	10%	21%	19%
	Residual income	$32,000	$69,125	$1,960
	*Calculations for Austen Company:
	Sales margin = Operating income / Sales * 100
	$40,000 / $100,000 * 100
	40%
	Capital turnover =   Sales / Total assets
	$100,000 / $80,000
	1.25 times
	Return on investment = Operating income / Total assets * 100
	$40,000 / $80,000 * 100
	50%
	Residual income = Net operating income - (Total assets * Target rate of return)
	$40,000 - ($80,000 * 10%)
	$40,000 - $8,000
	$32,000
	*Calculations for Plumb industries:
	Sales = Operating income / Sales margin
	$110,600 / 14%
	$790,000
	Total assets =   Sales / Capital turnover
	$790,000 / 4.00
	$197,500
	Return on investment = Operating income / Total assets * 100
	$110,600 / $197,500 * 100
	56%
	Residual income = Net operating income - (Total assets * Target rate of return)
	$110,600 - ($197,500 * 21%)
	$110,600 - $41,475
	$69,125
	*Calculations for Cleary, Inc.:
	Net operating income = Sales * Sales margin
	$490,000 * 8%
	$39,200
	Total assets = Operating income / Return on investment
	$39,200 / 20%
	$196,000
	Capital turnover =   Sales / Total assets
	$490,000 / $196,000
	2.5 times
	Residual income = Operating income - (Total assets * Target rate of return)
	$1,960 = $39,200 - ($196,000 * Target rate of return)
	($196,000 * Target rate of return) = $39,200 - $1,960
	$196,000 * Target rate of return = $37,240
	Target rate of return = $37,240 / $196,000
	19.00%