Return on investment (ROI): Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows: R O I = O p e r a t i n g I n c o m e A v e r a g e t o t a l a s s e t s Residual Income (RI): Residual Income is the income earned over and above the expected rate of return on assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Residual Income is as follows: R e s i d u a l I n c o m e = O p e r a t i n g I n c o m e – ( A v e r a g e a s s e t s × R e q u i r e d r a t e o r R e t u r n ) To calculate: The Return on investment and Residual Income.

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Chapter 10, Problem 7ME

To determine

Concept introduction:

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

ROI = Operating IncomeAverage total assets

Residual Income (RI):

Residual Income is the income earned over and above the expected rate of return on assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Residual Income is as follows:

Residual Income = Operating Income – (Average assets ×Required rate or Return)

To calculate:

The Return on investment and Residual Income.

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