Question

Return on Investment and Residual Income
Johnson Company has two sources of funds: long-term debt and equity capital. Johnson Company has profit centers in the following locations with the following net incomes and total assets:

		Net Income	Assets
Las Vegas		$1,280,000	$4,000,000
Dallas		1,520,000	8,000,000
Tampa		2,360,000	12,000,000

a. Calculate ROI for each profit center and rank them from highest to lowest based on ROI.

Round ROI to the nearest whole percentage.

	ROI	Rank
Las Vegas	Answer	Answer123
Dallas	Answer	Answer123
Tampa	Answer	Answer123

b. Calculate residual income for each profit center based on a desired ROI of 5% and rank them from highest to lowest based on residual income.

	ROI	Rank
Las Vegas	Answer	Answer123
Dallas	Answer	Answer123
Tampa	Answer	Answer123

Answer 1

Ans. A		ROI	Rank
	Las Vegas	32.00%	1
	Dallas	19.00%	3
	Tampa	19.67%	2
	*Calculations :
	Return on investment = Net income / Assets * 100
	Las Vegas	$1,280,000 / $4,000,000 * 100	32.00%
	Dallas	$1,520,000 / $8,000,000 * 100	19.00%
	Tampa	$2,360,000 / $12,000,000 * 100	19.67%
Ans. B		Residual Income (RI)	Rank
	Las Vegas	$1,080,000	3
	Dallas	$1,120,000	2
	Tampa	$1,760,000	1
	*Calculations :
		Las Vegas	Dallas	Tampa
	Assets	$4,000,000	$8,000,000	$12,000,000
	Desired ROI	5%	5%	5%
	Required net income	$200,000	$400,000	$600,000
	Net income	$1,280,000	$1,520,000	$2,360,000
	Required net income (above)	$200,000	$400,000	$600,000
	Residual income (loss)	$1,080,000	$1,120,000	$1,760,000
	*Residual income is the difference between Actual operating income and Required operating income.
	*The highest ROI and RI has been indicated with 1st rank.