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	$	126,000		$	133,000
Accounts receivable		334,000			489,000
Inventory		572,000			478,000
Plant and equipment, net		828,000			800,000
Investment in Buisson, S.A.		402,000			430,000
Land (undeveloped)		249,000			255,000
Total assets	$	2,511,000		$	2,585,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000		$	346,000
Long-term debt		1,041,000			1,041,000
Stockholders' equity		1,096,000			1,198,000
Total liabilities and stockholders' equity	$	2,511,000		$	2,585,000

Joel de Paris, Inc. Income Statement
Sales					$	4,136,000
Operating expenses						3,556,960
Net operating income						579,040
Interest and taxes:
Interest expense	$	125,000
Tax expense		194,000				319,000
Net income					$	260,040

The company paid dividends of $158,040 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

Beginning operating assets last year = 251,1000-402,000-24,9000=					1,860,000
Ending operating assets last year = 2585000-430000-255000=					1,900,000
1
Average operating assets = (1860000+1900000)/2=					1,880,000
2
Margin = Net operating income/Sales = 579040/4136000=					14%
Turnover = Sales/Average operating assets = 4136000/1880000=					2.2
ROI = Margin*Turnover = 14%*2.2=				30.8%
3
Residual income = 579040-(1880000*15%)=				297,040