Quick-Mart uses some of the space at its merchandise stores to generate profits
ID: 2529625 • Letter: Q
Question
Quick-Mart uses some of the space at its merchandise stores to generate profits from services. Compute the return on investment (ROI) and residual income (RI) for each profit center below.
Profit Center #1
Profit Center #2
Net Sales
$900,000
$1,400,000
Variable Costs
$600,000
$900,000
Contribution Margin
$300,000
$500,000
Traceable Fixed Costs
$100,000
$230,000
Operating Income
$200,000
$270,000
Avg. Operating Assets
$800,000
$1,020,000
Cost of Capital
20%
23%
35. The ROI for profit center #1 is:
a. 16.6% c. 19.8%
b. 12.3% d. None
36. The RI for profit center #1 is:
a. $40,000 c. $52,000
b. $87,000 d. None
Profit Center #1
Profit Center #2
Net Sales
$900,000
$1,400,000
Variable Costs
$600,000
$900,000
Contribution Margin
$300,000
$500,000
Traceable Fixed Costs
$100,000
$230,000
Operating Income
$200,000
$270,000
Avg. Operating Assets
$800,000
$1,020,000
Cost of Capital
20%
23%
Explanation / Answer
Ratios for Profit Center #1
35. Return on Investment = Operating profit of the department divided by the total departmental costs = 200,000 divided by 700,000 = 28.57% . The total cost is 600,000 plus 100,000.
Hence, the answer is none of the above. option d
36. Residual Income = Operating income reduced by Average operating assets multiplied by cost of capital = 200,000 - 160,000 = 40,000 . 20% on 800,000 gives 160,000
Correct answer is option a.
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