Question

Financial data for Bridger Inc. for last year are as follows:

BRIDGER INC. Balance Sheet
	Ending Balance			Beginning Balance
Assets
Cash	$	156,000		$	151,000
Accounts receivable		420,000			280,000
Inventory		430,000			510,000
Plant and equipment, net		634,000			659,000
Investment in Brier Company		510,000			480,000
Land (undeveloped)		330,000			330,000
Total assets	$	2,480,000		$	2,410,000
Liabilities and Shareholders’ Equity
Accounts payable	$	240,000		$	280,000
Long-term debt		1,000,000			1,000,000
Shareholders’ equity		1,240,000			1,130,000
Total liabilities and shareholders’ equity	$	2,480,000		$	2,410,000

BRIDGER INC. Income Statement
Sales				$	4,050,000
Operating expenses					3,564,000
Operating income					486,000
Interest and taxes:
Interest expense	$	105,000
Tax expense		160,000			265,000
Net income				$	221,000

The company paid dividends of $110,000 last year. The “Investment in Brier Company” on the balance sheet represents an investment in the common shares of another company.

Required:
1.Compute the company’s margin, turnover, and ROI for last year. (Round your intermediate calculations and final answers to 1 decimal place.)

2. The board of directors of Bridger Inc. has set a minimum required return of 17%. What was the company’s residual income last year?

Answer 1

1.

Margin	12%
Turnover	2.5
ROI	30%

Explanation:-

	Ending Balances	Beginning Balances
Cash	$156,000	$151,000
Account Receivable	$420,000	$280,000
Inventory	$430,000	$510,000
Plant and Equipment (net)	$634,000	$659,000
Total operating assets	$1,640,000	$1,600,000

Average operating Assets = Operating assets of ending balance + operating assets of beginning balance/2

Average operating assets = ($1,640,000 + $1,600,000)/2

Average operating assets = $3,240,000/2

Average operating assets = $1,620,000

Margin = Net operating income/ Sales

Margin = $486,000/$4,050,000

Margin = 12%

Turnover = Sales/ Average operating assets

Turnover = $4,050,000/$1,620,000

Turnover = 2.5

ROI = Margin × Turnover

ROI = 12% × 2.5

ROI = 30%

2.

Residual Income

$210,600

Explanation:-

Net Operating income	$486,000
Minimum required return ($1,620,000 ×17%)	$275,400
Residual income ($486,000 - $275,400)	$210,600

Note) Minimum required return = Average operating assets × 17%