Question

Financial data for Beaker Company for last year appear below:

Beaker Company
Statements of Financial Position
	Beginning Balance			Ending Balance
Assets:
Cash	$	290,000		$	451,280
Accounts receivable		209,000			193,000
Inventory		282,000			232,000
Plant and equipment (net)		430,000			393,000
Investment in Cedar Company		304,000			255,000
Land (undeveloped)		241,000			241,000
Total assets	$	1,756,000		$	1,765,280
Liabilities and owners' equity:
Accounts payable	$	208,000		$	175,000
Long-term debt		824,000			824,000
Owners' equity		724,000			766,280
Total liabilities and owners' equity	$	1,756,000		$	1,765,280

Beaker Company
Income Statement
Sales				$	1,960,000
Less operating expenses					1,519,000
Net operating income					441,000
Less interest and taxes:
Interest expense	$	103,600
Tax expense		141,120			244,720
Net income				$	196,280

The company paid dividends of $154,000 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 30%. What was the company's residual income last year?

Answer 1

Average operating assets

Operating assets do not include investments in other companies or in undeveloped land

= ($1211000 + $1269280) ÷ 2

= $1240140

Margin

= Net operating income ÷ Sales

= $441000÷ $1960,000

= 22.60%

Turnover

= Sales ÷ Average operating assets

= $1,960,000 ÷ $1240140

= 1.58

ROI

= Net operating income ÷ Average operating assets

= $441,000 ÷ $1240140

= 35.56%

______________________________________

2

Net operating income	441,000
Less:
Minimum required return (30% x 1240140)	372042
Residual Income	68,958