(a)
Compute the missing terms.
(a)
Explanation of Solution
Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Formula of profit margin:
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
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.
Formula of ROI according to Dupont formula:
Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.
Formula of residual income:
Income from operations | XXX |
Less minimum acceptable income from operations as a percent of invested assets | XXX |
Residual income | XXX |
Table (1)
1)
Compute income from operations.
2)
Compute invested assets.
Note: Refer to missing amount (a) for value of income from operations.
3)
Compute investment turnover.
4)
Compute sales value.
5)
Compute sales value.
Note: Refer to missing amount (d) for value of sales.
6)
Compute ROI.
Note: Refer to missing amount (e) for value of invested assets.
7)
Compute income from operations.
8)
Compute profit margin.
Note: Refer to missing amount (g) for value of income from operations.
9)
Compute investment turnover.
10)
Compute ROI.
11)
Compute profit margin.
12)
Compute investment turnover.
(b)
Ascertain the residual income of for each division
(b)
Explanation of Solution
1)
Ascertain the residual income of N Division.
Step 1: Compute minimum acceptable income from operations as a percent of invested assets for N Division.
Note: Refer to missing amount (b) of part (a) for value of invested assets.
Step 2: Determine residual income of N Division.
Particulars | Amount ($) |
Income from operations | $60,200 |
Less minimum acceptable income from operations as a percent of invested assets | 41,280 |
Residual income | $18,920 |
Table (2)
Note: Refer to missing amount (a) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.
2)
Ascertain the residual income of S Division.
Step 1: Compute minimum acceptable income from operations as a percent of invested assets for S Division.
Note: Refer to missing amount (e) of part (a) for value of invested assets.
Step 2: Determine residual income of S Division.
Particulars | Amount ($) |
Income from operations | $51,300 |
Less minimum acceptable income from operations as a percent of invested assets | 36,000 |
Residual income | $15,300 |
Table (3)
Note: Refer to Step 1 for value and computation of minimum acceptable income.
3)
Ascertain the residual income of E Division.
Step 1: Compute minimum acceptable income from operations as a percent of invested assets for E Division.
Step 2: Determine residual income of E Division.
Particulars | Amount ($) |
Income from operations | $102,000 |
Less minimum acceptable income from operations as a percent of invested assets | 81,600 |
Residual income | $20,400 |
Table (4)
Note: Refer to missing amount (g) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.
4)
Ascertain the residual income of W Division.
Step 1: Compute minimum acceptable income from operations as a percent of invested assets for W Division.
Step 2: Determine residual income of W Division.
Particulars | Amount ($) |
Income from operations | $89,600 |
Less minimum acceptable income from operations as a percent of invested assets | 67,200 |
Residual income | $22,400 |
Table (5)
Note: Refer to missing amount (g) of part (a) for value of income from operations, and Step 1 for value and computation of minimum acceptable income.
(c) 1
Ascertain the profitable division in terms of ROI.
(c) 1
Explanation of Solution
The division with highest return on investment is considered as the most profitable division. Hence, N Division is the most profitable division with highest ROI of 17.5%.
(c) 2
Ascertain the division with highest residual income
(c) 2
Explanation of Solution
The division with highest residual income is considered as the most profitable division. Hence, W Division is the most profitable division with the highest residual income of $22,400.
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Chapter 24 Solutions
Financial And Managerial Accounting
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