Question

Financial data for Bingham Company for last year appear below:

Bingham Company

Balance Sheet

For the years ended Dec 31 2018 and 2019

ASSETS	Dec 31, 2018	Dec 31, 2019
Cash	135,000	266,000
Accounts Receivable	225,000	475,000
Inventory	314,000	394,000
Plant+Equipment (net)	940,000	860,000
Investment in Carr Corp.	104,000	101,000
Land	198,000	65,000
Total Assets	1,916,000	2,161,000
LIABILITIES + EQUITY
Accounts Payable	88,000	119,000
Long-Term Debt	585,000	665,000
Owner’s equity	1,243,000	1,377,000
Total Liabilities + Equity	1,916,000	2,161,000

Bingham Company

Income Statement

For the year ended December 31 2019

	Dec 31, 2018	Dec 31, 2019
Sales	4,040,000	4,464,000
Operating Expenses	3,700,000	4,291,000
Income before Interest + Taxes	260,000	353,000
Interest Expense	55,000	90,000
Tax Expense	85,000	129,000
Operating Income	120,000	134,000

The "Investment in Carr Company" on the statement of financial position represents an investment in the stock of another company.

Required:

a) Compute the company's margin, turnover, and return on investment for last year.
b) The Board of Directors of Beaker Company have set a minimum required return of 15%. What was the company's residual income last year?

Answer 1

Solution:
a)	Margin =   Income before interest and taxes /Sales
	=   353,000/4,464,000
	=   7.91%
	Operating Assets	31-Dec-18	31-Dec-19
	Cash	135,000	266,000
	Accounts receivable	225,000	475,000
	Inventory	314,000	394,000
	Plant+Equipment(Net)	940,000	860,000
	Total	1,614,000	1,995,000
	Operating assets do not include investment in other companies, and land .
	Average Operating Assets = (1,614,000 + 1,995,000)/2 = 1,804,500
	Turnover = Sales / average operating assets
	= 4,464,000/1,804,500
	= 2.47
	ROI = Income before interest and taxes / Average operating assets
	=    353,000/1,804,500
	= 19.56%
b)	Income before interest and taxes	353,000
	Minimum required return(1,804,500*15%)	-270,675
	Residual Income	82,325