A family friend has asked your help in analyzing the operations of three anonymo
ID: 2523307 • Letter: A
Question
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: (Loss amounts should be indicated by a minus sign. Round your percentage answers to nearest whole percent and other amounts to whole dollars.)
Company A B C Sales $500,000 $710,000 $630,000 Net operating income $50,000 Average operating assets $168,000 $151,000 Return on investment (ROI) 22 % 16 % % Minimum required rate of return: Percentage 16 % % 10 % Dollar amount $46,000 Residual income $6,000Explanation / Answer
Answer
Company – A
Net Operating Income = Average Operating Assets * Return on Investment
= $168,000 * 22%
Net Operating Income = $36,960
Minimum Required rate of return (Dollar Amount) = Average Operating Assets * Minimum Rate of Return
= $168,000 * 16%
Minimum Required rate of return (Dollar Amount) = $26,880
Residual Income = Net Operating Income – Minimum required Dollar amount
= $36,960 - $26,880
Residual Income = $10,080
Company – B
Average Operating Assets = Net Operating Income / Return on Investments
= 50,000 / 16%
Average Operating Assets = $312,500
Minimum Required rate of return (In Percentage) = (Dollar Amount / Average Operating Assets) * 100
= (46,000 / 312,500) * 100
Minimum Required rate of return (In Percentage) = 14.72%
Residual Income = Net Operating Income – Minimum required Dollar amount
= $50,000 – 46,000
Residual Income = $4,000
Company – C
Minimum Required rate of return (Dollar Amount) = Average Operating Assets * Minimum Rate of Return
= $151,000 * 10%
Minimum Required rate of return (Dollar Amount) = $15,100
Net Operating Income - Minimum Required rate of return (Dollar Amount) = Residual Income
Net Operating Income = Minimum Required rate of return (Dollar Amount) + Residual Income
= 15,100 + 6,000
Net Operating Income = $21,100
Return on Investment = (Net Operating Income / Average Operating Assets) * 100
= (21,100 / 151,000) * 100
Return on Investment = 13.97%
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