Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	125,000
Accounts receivable		343,000			473,000
Inventory		567,000			479,000
Plant and equipment, net		820,000			833,000
Investment in Buisson, S.A.		401,000			429,000
Land (undeveloped)		247,000			245,000
Total assets	$	2,518,000		$	2,584,000
Liabilities and Stockholders' Equity
Accounts payable	$	380,000		$	341,000
Long-term debt		1,041,000			1,041,000
Stockholders' equity		1,097,000			1,202,000
Total liabilities and stockholders' equity	$	2,518,000		$	2,584,000

Joel de Paris, Inc. Income Statement
Sales					$	4,725,000
Operating expenses						3,921,750
Net operating income						803,250
Interest and taxes:
Interest expense	$	129,000
Tax expense		204,000				333,000
Net income					$	470,250

The company paid dividends of $365,250 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

Answer 1

1
Beginning Operating assets	1870000	=2518000-401000-247000
Ending Operating assets	1910000	=2584000-429000-245000
Average Operating assets	1890000	=(1870000+1910000)/2
2
Margin = Net operating income/Sales
Turnover = Sales/Average Operating assets
ROI = Margin*Turnover
Margin	17.00%	=803250/4725000
Turnover	2.50	=4725000/1890000
ROI	42.50%	=17%*2.50
3
Net operating income	803250
Less: Minimum required return	283500	=1890000*15%
Residual Income	519750