Financial data for Beaker Company for last year appear below: The company paid d

Question

Financial data for Beaker Company for last year appear below:

The company paid dividends of $190,000 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.

Required:

a. Compute the company's margin, turnover, and return on investment for last year.

b. The Board of Directors of Beaker Company has set a minimum required return of 35%. What was the company's residual income last year?

Beaker Company Statements of Financial Position Beginning Balance Ending Balance Assets: Cash $ 335,000 $ 471,760 Accounts receivable 210,000 176,000 Inventory 296,000 264,000 Plant and equipment (net) 508,000 460,000 Investment in Cedar Company 229,000 295,000 Land (undeveloped) 182,000 182,000 Total assets $ 1,760,000 $ 1,848,760 Liabilities and owners' equity: Accounts payable $ 190,000 $ 235,000 Long-term debt 833,000 833,000 Owners' equity 737,000 780,760 Total liabilities and owners' equity $ 1,760,000 $ 1,848,760

Explanation / Answer

Beginning operating assets=1760000-229000-182000= $1349000 Ending operating assets=1848760-295000-182000= $1371760 Average operating assets=(1349000+1371760)/2= $1360380 a Margin=Net operating income/Sales=533000/2050000= 26% Turnover=Sales/Average operating assets=2050000/1360380= 1.51 Return on investment=26%*1.51= 39.26% or 39.18% b Residual income=533000-(1360380*35%)= $56867

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