1) 2) A family friend has asked your help in analyzing the operations of three a
ID: 2531850 • Letter: 1
Question
1)
2)
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 S 400,000 S 660,000 $ 790,000 35,000 Sales Net operating income Average operating assets Return on investment (ROI) Minimum required rate of return S 169,000 $ 141,000 201% 171% 15% 12% Percentage Dollar amount 47,000 Residual income 6,000Explanation / Answer
Answer to Question 1:
Company A:
Return on Investment = Net Operating Income / Average Operating Assets
20% = Net Operating Income / $169,000
Net Operating Income = $33,800
Minimum Required Return = Minimum Required Rate of Return * Average Operating Assets
Minimum Required Return = 15% * $169,000
Minimum Required Return = $25,350
Residual Income = Net Operating Income - Minimum Required Rate of Return
Residual Income = $33,800 - $25,350
Residual Income = $8,450
Company B:
Return on Investment = Net Operating Income / Average Operating Assets
17% = $35,000 / Average Operating Assets
Average Operating Assets = $205,882
Minimum Required Return = Minimum Required Rate of Return * Average Operating Assets
$47,000 = Minimum Required Rate of Return * $205,882
Minimum Required Rate of Return = 22.83%
Residual Income = Net Operating Income - Minimum Required Rate of Return
Residual Income = $35,000 - $47,000
Residual Income = -$12,000
Company C:
Residual Income = Net Operating Income - Minimum Required Rate of Return * Average Operating Assets
$6,000 = Net Operating Income - 12% * $141,000
Net Operating Income = $22,920
Return on Investment = Net Operating Income / Average Operating Assets
Return on Investment = $22,920 / $141,000
Return on Investment = 16.26%
Minimum Required Return = Minimum Required Rate of Return * Average Operating Assets
Minimum Required Return = 12% * $141,000
Minimum Required Return = $16,920
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