Concept explainers
(a)
Concept Introduction:
The missing items in return on investment and residual income computations.
Answer to Problem 14.16E
The following table represents various rates of return on investment and residual incomes:
Divisions | Sales | Income from operations | Invested Assets | Return on Investment | Profit Margin | Investment Turnover |
California | | | | | | |
Midwest | | | | | | |
Northwest | | | | | | |
Texas | | | | | | |
Explanation of Solution
California:
Thus, operating income is
Invested turnover is computed as:
Midwest:
Invested asset is computed as:
Return on investment is as:
Northwest:
Invested turnover is computed as:
Texas:
Invested turnover is computed as:
(b)
Concept Introduction:
Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.
The residual income assuming the minimum acceptable rate of return is
Answer to Problem 14.16E
The following table represents various rates of return on investment and residual incomes:
Divisions | Sales | Income from operations | Invested Assets | Minimum rate of return | Minimum income | Residual income |
California | | | | | | |
Midwest | | | | | | |
Northwest | | | | | | |
Texas | | | | | | |
Explanation of Solution
The minimum income is computed by multiplying the invested assets with the minimum rate of return.
As in the above table the minimum income i.e.
The residual income is calculated by computing the difference between income from operations and minimum income.
As in the above table the residual income i.e.
(c)
Concept Introduction:
Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.
The profitable division in term of return on investment and residual income.
Answer to Problem 14.16E
The profitable division in term of return on investment is Texas and residual income is Northwest.
Explanation of Solution
The return on investment is highest in the Texas division in comparison to others. So, it is the most profitable division in terms of return.
The residual income is highest in the Northwest division in comparison to others. So, it is the most profitable division in terms of residual income.
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Chapter 14 Solutions
Survey of Accounting (Accounting I)
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- Effect of proposals on divisional performance A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31, 20Y9, is as follows: Assume that the Commercial Division received no allocations from support departments. The president of Maxell Manufacturing has indicated that the divisions return on a 2,500,000 investment must be increased to at least 21% by the end of the next year if operations are to continue. The division manager is considering the following three proposals: Proposal 1: Transfer equipment with a book value of 312,500 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by 105,000. This increase in expense would be included as part of the cost of goods sold. Sales would remain unchanged. Proposal 2: Purchase new and more efficient machining equipment and thereby reduce the cost of goods sold by 560,000 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old equipment, which has no remaining book value, would be scrapped at no gain or loss. The new equipment would increase invested assets by an additional 1,875,000 for the year. Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of 595,000, reduce cost of goods sold by 406,700, and reduce operating expenses by 175,000. Assets of 1,338,000 would be transferred to other divisions at no gain or loss. Instructions 1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Commercial Division for the past year. 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round the investment turnover and return on investment to one decimal place. 4. Which of the three proposals would meet the required 21% return on investment? 5. If the Commercial Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the presidents required 21% return on investment?arrow_forwardJarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Required: 1. Compute the ROI and the margin and turnover ratios for each year for the Furniture Division. (Round your answers to four significant digits.) 2. Compute the ROI and the margin and turnover ratios for each year for the Houseware Division. (Round your answers to four significant digits.) 3. Explain the change in ROI from Year 1 to Year 2 for each division.arrow_forwardMargin, Turnover, Return on Investment, Average Operating Assets Elway Company provided the following income statement for the last year: At the beginning of last year, Elway had 28,300,000 in operating assets. At the end of the year, Elway had 23,700,000 in operating assets. Required: 1. Compute average operating assets. 2. Compute the margin and turnover ratios for last year. (Note: Round the answer for margin ratio to two decimal places.) 3. Compute ROI. (Note: Round answer to two decimal places.) 4. CONCEPTUAL CONNECTION Briefly explain the meaning of ROI. 5. CONCEPTUAL CONNECTION Comment on why the ROI for Elway Company is relatively high (as compared to the lower ROI of a typical manufacturing company).arrow_forward
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