Question

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Exercise 10-9 Return on Investment (ROI) and Residual Income Relations [LO10-1, LO10-2]

A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: (Loss amounts should be indicated by a minus sign. Round your percentage answers to nearest whole percent.)

	Company
	A		B		C
Sales	$9,000,000		$7,000,000		$4,500,000
Net operating income			$280,000
Average operating assets	$3,000,000				$1,800,000
Return on investment (ROI)	18	%	14	%		%
Minimum required rate of return:
Percentage	16	%		%	15	%
Dollar amount			$320,000
Residual income					$90,000

Answer 1

	A	B	C
Sales	9000000	7000000	4500000
Net operating income	540000	280000	360000
Average operating assets	3000000	2000000	1800000
Return on investment (ROI)	18%	14%	20%
Minimum required rate of return:
Percentage	16%	16%	15%
Dollar amount	480000	320000	270000
Residual income	60000	-40000	90000
Workings:
Company A
Net operating income = 3000000*18%=$540000
Dollar amount = 3000000*16%=$480000
Residual income = 540000-480000 = $60000
Company B
Average operating assets = 280000/14%=2000000
Percentage = 320000/2000000 = 16%
Residual income = 280000-320000 = -40000
Company C
Net operating income =270000+90000 =$360000
(ROI) = 360000/1800000 = 20%
Dollar amount = 1800000*15%=$270000