Lumberton Home Maintenance Company (LHMC) earned operating income of $6,000,000
ID: 2513010 • Letter: L
Question
Lumberton Home Maintenance Company (LHMC) earned operating income of $6,000,000 on operating assets of $62,500,000 during 2018. The Tree Cutting Division earned $1,000,000 on operating assets of $10,000,000. LHMC has offered the Tree Cutting Division $1,250,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $112,500. LHMC has a desired return on investment (ROI) of 8 percent.
Required
Calculate the return on investment for LHMC, the Tree Cutting Division, and the additional investment opportunity.
Calculate the residual income for LHMC, the Tree Cutting Division, and the additional investment opportunity
Explanation / Answer
1) Return on investment = net operating income / net operating assets LHMC: net operating income = $6000000 net operating assets = $62500000 Return on investment = $6000000/$62500000 = 9.6% Tree Cutting Division: net operating income = $1000000 net operating assets = $10000000 Return on investment = $1000000/$10000000 = 10% additional investment opportunity: net operating income = $112500 net operating assets = $1250000 Return on investment = $1000000/$10000000 = 9% 2) Residual income = net operating income - (Minimum required return on assets*Average operating assets of the department) LHMC: net operating income = $6000000 net operating assets = $62500000 Minimum required return on assets = 8% Residual income = $6000000-(8%*62500000) = $1000000 Tree Cutting Division: net operating income = $1000000 net operating assets = $10000000 Minimum required return on assets = 8% Residual income = $1000000-(8%*10000000) = $200000 additional investment opportunity: net operating income = $112500 net operating assets = $1250000 Minimum required return on assets = 8% Residual income = $112500-(8%*1250000) = $12500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.