Sales
income from
Operations
invested
Assets
rate of return
on investment profit Margin
investment
turnover
North $750,000 (a) (b) 20% 8% (c)
South (d) $75,600 (e) (f ) 12% 1.8
East $840,000 (g) $280,000 18% (h) (i)
West $1,100,000 $99,000 $550,000 (j) (k) (l)
a. Determine the missing items, identifying each by the letters (a) through (l). Round percents and investment turnover to one decimal place.
b. Determine the residual income for each division, assuming that the minimum acceptable rate of return established by management is 10%.
c. Which division is the most profitable in terms of (1) return on investment and (2) residual income?
Answer:
a.
(a) $60,000 ($750,000 × 8%)
(b) $300,000 ($60,000 ÷ 20%)
(c) 2.5 (20% ÷ 8%) or $750,000 ÷ $300,000
(d) $630,000 ($75,600 ÷ 12%)
(e) $350,000 ($630,000 ÷ 1.8)
(f) 21.6% (12% × 1.8)
(g) $50,400 ($280,000 × 18%)
(h) 6.0% ($50,400 ÷ $840,000)
(i) 3.0 ($840,000 ÷ $280,000)
(j) 18.0% ($99,000 ÷ $550,000)
(k) 9.0% ($99,000 ÷ $1,100,000)
(l) 2.0 ($1,100,000 ÷ $550,000)
b.
North Division: $30,000 [$60,000 – ($300,000 × 10%)]
South Division: $40,600 [$75,600 – ($350,000 × 10%)]
East Division: $22,400 [$50,400 – ($280,000 × 10%)]
West Division: $44,000 [$99,000 – ($550,000 × 10%)]
c.
(1) The South Division has the highest return on investment (21.6%).
(2) The West Division has the largest residual income.