Question

The operating income and the amount of invested assets in each division of Conley Industries are as follows:

	Operating income		Invested Assets
Retail Division	$60,800		$320,000
Commercial Division	52,800		240,000
Internet Division	181,700		790,000

Assume that management has established a 8% minimum acceptable return for invested assets.

a. Determine the residual income for each division.

	Retail Division			Commercial Division			Internet Division
Operating income	$60,800			$52,800			$181,700
Minimum acceptable operating income as a percent of invested assets
Residual income

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Determining missing items in return on investment computation

One item is omitted from each of the following computations of the return on investment:

Return on Investment		=	Profit Margin		x	Investment Turnover
28 %		=	10 %		x	(a)
(b)		=	24 %		x	0.75
12 %		=	(c)		x	1.5
12 %		=	20 %		x	(d)
(e)		=	15 %		x	2

Determine the missing items identified by the letters as shown above. If required, round your answers to two decimal places.

(a)
(b)
(c)
(d)
(e)

Answer 1

a. Determine the residual income for each division.

	Retail Division			Commercial Division			Internet Division
Operating income	$60,800			$52,800			$181,700
Minimum acceptable operating income as a percent of invested assets	320000*8% = 25600			240000*8% = 19200			790000*8% = 63200
Residual income	35200			33600			118500

2a) 28/10 = 2.8

2b) 24*.75 = 18%

2c) 12/1.5 = 8%

2d) 12/20 = 0.6

2e) 15*2 = 30%