Exercise 9-8 Return on Investment (ROI) and Residual Income Relations [LO1, LO2]

Question

Exercise 9-8 Return on Investment (ROI) and Residual Income Relations [LO1, LO2]

A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: (Negative amounts should be indicated with a minus sign. Do not round immediate calculations, but round your final answers to the nearest whole number.)

Company

A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: (Negative amounts should be indicated with a minus sign. Do not round immediate calculations, but round your final answers to the nearest whole number.)

Explanation / Answer

For Business A

Return on investment = Net operating income/ Average operating assets

Net operating income = 18%*154000 = 27720

Dollar amount = 16%*154,000 = $24640

Residual income = Net Income - Dollar amount = 27720-24640= $3080

For Business B

Return on investment = Net operating income/ Average operating assets

Average operating assets = 54000/18% = $300,000

Dollar amount = Percentage* Average operating assets

Percentage = 50,000/300,000= 17%

Residual income = 54000- 50000= $4000

For Business C

Residual income = Net Income - Dollar amount

5000 = Net income -9%*156000

Net operating income= $19040

Dollar amount = 9%*156000 = $14040

Return on investment = 19040/156000 = 12%

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