Gen Combo Looseleaf Financial And Managerial Accounting; Connect Access Card
Gen Combo Looseleaf Financial And Managerial Accounting; Connect Access Card
18th Edition
ISBN: 9781260149197
Author: williams
Publisher: MCG
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Chapter 25, Problem 12E
To determine

Compute the missing data for Companies X, Y and Z.

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Answer to Problem 12E

The missing data for Companies X, Y and Z are as follows:

ParticularsCompany XCompany YCompany Z
Operating income $220,000e. $1,200,000i. $4,800,000
Salesa. $687,500f. $3,000,000j. $9,600,000
Invested capitalb. $3,437,500$6,000,000$32,000,000
Return on sales32%40%k. 50%
Capital turnover20%g. 50%30%
Return on investmentc. 6.4%20%15%
Minimum acceptable return10%12%l. 12 %
Residual income (loss)d. ($123,750)h. $480,000$960,000

Table (1)

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. The formula for ROI is as follows:

Return on investment(ROI)  = Operating income Average total investment

Residual income: Residual income is the excess of income over the minimum acceptable return on average capital invested. The minimum rate of return shows the opportunity cost of using the invested capital. The formula for residual income is as follows:

Residual income  = Operating earnings{(Minimum acceptable return)×Invested capital}

Capital turnover:   Capital turnover is a ratio that measures the amount of sales generated from each dollar of capital investment. Thus, it shows the relationship between the net sales and the average capital invested. The formula to calculate capita turnover is as follows:

Capital turnover ratio=Net salesAverage total assets

Return on sales: This financial ratio evaluates the operating income that can be expected from one dollar of sales. The formula to calculate the return on sales is as follows:

Return on sales  = Operating earningsNet sales

Working Note:

a. Compute sales for Company X.

Return on sales=Operating incomeNet sales32%=$220,000Net salesNet sales=$220,00032×100=$687,500

(1)

b. Compute invested capital for Company X.

Capital turnover=Net salesAverage investment20%=$687,500(1)Average investmentAverage investment=$687,50020×100=$3,437,500

(2)

c. Compute return on investment for Company X.

Return on investment=Capital turnover×return on sales=20%×32%=6.4%

d. Compute residual income for Company X.

Residual income  = Operating earnings{(Minimum acceptable return)×Invested capital}=$220,000(10%×$3,437,500(2))=$220,000$343,750=($123,750)

e. Compute operating income for Company Y.

Return on investment=Operating incomeAverage capital invested20%=Operating income$6,000,000Operating income=$6,000,000×20%Operating income=$1,200,000

(3)

f. Compute sales for Company Y.

Return on sales=Operating incomeNet sales40%=$1,200,000(3)Net salesNet sales=$1,200,00040×100=$3,000,000

g. Compute capital turnover for Company Y.

Capital turnover=Net salesAverage investment=$3,000,000$6,000,000=50%

h. Compute residual income for Company Y.

Residual income  = Operating earnings{(Minimum acceptable return)×Invested capital}=$1,200,000(3)(12%×$6,000,000)=$1,200,000$720,000=$480,000

i. Compute operating income for Company Z.

Return on investment=Operating incomeAverage capital invested15%=Operating income$32,000,000Operating income=$32,000,000×15%Operating income=$4,800,000

(4)

j. Compute sales for Company Z.

Capital turnover=Net salesAverage investment30%=Net sales$32,000,000Net sales=$32,000,000×30%=$9,600,000

(5)

k. Compute return on sales for Company Z.

Return on sales=Operating incomeNet sales=$4,800,000(4)$9,600,000(5)=50%

l. Compute minimum acceptable return for Company Z.

Residual income  = Operating earnings{(Minimum acceptable return)×Invested capital}$960,000=$4,800,000(4){(Minimum acceptable return)×$32,000,000}$4,800,000$960,000={(Minimum acceptable return)×$32,000,000}$3,840,000=(Minimum acceptable return)×$32,000,000

Minimum acceptable return=$3,840,000$32,000,000Minimum acceptable return=12%

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Chapter 25 Solutions

Gen Combo Looseleaf Financial And Managerial Accounting; Connect Access Card

Ch. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Prob. 8DQCh. 25 - Prob. 9DQCh. 25 - Prob. 10DQCh. 25 - Prob. 11DQCh. 25 - Prob. 12DQCh. 25 - Prob. 13DQCh. 25 - Prob. 14DQCh. 25 - Prob. 15DQCh. 25 - Prob. 1BECh. 25 - Prob. 2BECh. 25 - Prob. 3BECh. 25 - LO25-5 BRIEF EXERCISE 25.4 Balanced...Ch. 25 - LO25-2, LO25-3 BRIEF EXERCISE 25.5 Computations...Ch. 25 - LO25-3 BRIEF EXERCISE 25.6 Criticisms of...Ch. 25 - LO25-2, LO25-4 BRIEF EXERCISE 25.7 Calculate...Ch. 25 - LO25-4 BRIEF EXERCISE 25.8 Calculate EVA The...Ch. 25 - LO25-6 BRIEF EXERCISE 25.9 Variable versus Fixed...Ch. 25 - LO25-2 BRIEF EXERCISE 25.10 Components of...Ch. 25 - LO25-2, LO25-3, LO25-4, LO25-5, LO25-6 EXERCISE...Ch. 25 - Prob. 2ECh. 25 - LO25-1 EXERCISE 25.3 Employee Motivation Assume...Ch. 25 - LO25-2, LO25-3, LO25-4 EXERCISE 25.4 ROI versus...Ch. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Prob. 1APCh. 25 - Prob. 2APCh. 25 - Prob. 3APCh. 25 - Prob. 4APCh. 25 - Prob. 5APCh. 25 - LO25-5, LO25-6 PROBLEM 25.6A Balanced Scorecard...Ch. 25 - Prob. 7APCh. 25 - Prob. 8APCh. 25 - Prob. 9APCh. 25 - Prob. 1BPCh. 25 - Prob. 2BPCh. 25 - LO25-1, LO25-2, LO25-3, LO25-4 PROBLEM...Ch. 25 - Prob. 4BPCh. 25 - Prob. 5BPCh. 25 - LO25-5, LO25-6 PROBLEM 25.6B Balanced Scorecard in...Ch. 25 - Prob. 7BPCh. 25 - Prob. 8BPCh. 25 - Prob. 9BPCh. 25 - Prob. 1CTCCh. 25 - Prob. 2CTCCh. 25 - Prob. 6CP
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