In: Accounting
Determining Missing Items from Computations
Data for the North, South, East and West divisions of Free Bird Company are as follows:
Sales |
Income from Operations |
Invested Assets |
Return on Investment | Profit Margin | Investment Turnover |
||||||||
North | $860,000 | (a) | (b) | 17.5% | 7.0% | (c) | |||||||
South | (d) | $51,300 | (e) | (f) | 4.5% | 3.8 | |||||||
East | $1,020,000 | (g) | $680,000 | 15.0% | (h) | (i) | |||||||
West | $1,120,000 | $89,600 | $560,000 | (j) | (k) | (l) |
a. Determine the missing items, identifying each by the letters (a) through (l). If required, round percents and investment turnover to one decimal place.
a. | $ | ||||||||||
b. | $ | ||||||||||
c. | |||||||||||
d. | $ | ||||||||||
e. | $ | ||||||||||
f. | % | ||||||||||
g. | $ | ||||||||||
h. | % | ||||||||||
i. | |||||||||||
j. | % | ||||||||||
k. | % | ||||||||||
l. |
b. Determine the The excess of divisional income from operations over a minimum acceptable income from operations.residual income for each division, assuming that the minimum acceptable rate of return established by management is 12%.
Division | Residual Income |
North Division | $ |
South Division | $ |
East Division | $ |
West Division | $ |
c. Which division is the most profitable in terms of (1) return on investment and (2) residual income?
Most Profitable | |
1. Return on Investment |
|
2. Residual Income |
|
A.
Return on investment = Income from operations / Invested asstes
Profit margin = Income from operations / Sales
Investment turnover = Sales / Invested assets
Sales | Income from operations | Invested assets | Return on Investment | Profit margin | Investment turnover | |
North | 860,000 | 60,200 (860,000*7%) | 344,000 (60,200/17.5%) | 17.5% | 7.0% | 2.5 (860,000/344,000) |
South |
1,140,000 (51,300/4.5%) |
51,300 | 300,000 (1,140,000/3.8) | 17.1% (51,300/300,000) | 4.5% | 3.8 |
East | 1,020,000 | 102,000 (680,000*15%) | 680,000 | 15% | 10% (102,000/1,020,000) | 1.5 (1,020,000/680,000) |
West | 1,120,000 | 89,600 | 560,000 | 16% (89,600/560,000) | 8% (89,600/1,120,000) | 2 (1,120,000/560,000) |
A = 60,200
B = 344,000
C = 2.5
D = 1,140,000
E = 300,000
F = 17.1%
G = 680,000
H = 10%
I = 1.5
J = 16%
K = 8%
L = 2
B.
Residual income = Income from operations - (Invested assets*Return on Investment)
North = 60,200 - (344,000*12%) = 18,920
South = 51,300 - (300,000*12%) = 15,300
East = 102,000 - (680,000*12%) = 20,400
West = 89,600 - (560,000*12%) = 22,400
C.
1. North division (17.5%) is more profitable in terms of return on investment.
2. West division (22,400) is more profitable in terms of Residual income.