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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Return on investment, residual income for a service company

 H&R Block Inc. provides tax preparation services throughout the United States and other parts of the world. These services are provided through two segments: company-owned offices and franchised operations.

 Recent financial information provided by H&R Block for its company-owned and franchised operations is as follows (in millions):

  Company-Owned Franchised Operations
Revenues $2,651 $335
Income from operations 617 86
Total assets 3,930 586

 a. Use the DuPont formula to determine the return on investment for each business divisions. Round whole percents to one decimal place and investment turnover to two decimal places.

 b. Determine the residual income for each division, assuming a minimum acceptable income of 15% of total assets. Round minimal acceptable return to the nearest million dollars.

 c. Interpret your results.

a.

To determine

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:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

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:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

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)

To determine: Return on investment of CO and FO Divisions, using Dupont formula

Explanation

Determine ROI of CO Division, if income from operations is $617,000,000, and sales are $2,651,000,000, and assets invested are $3,930,000,000.

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$617,000,000$2,651,000,000×$2,651,000,000$3,930,000,00023.3% ×0.67= 15

b.

To determine
Residual income of for CO and FO division

c.

To determine

To interpret: The working of CO and FO Divisions

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