Question

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 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

Answer 1

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) $60200 ($860000 × 7%)
(b) $344000 ($60200 ÷ 17.5%)
(c) 2.5 ($860000 ÷ $344000)
(d) $1140000 ($51300 ÷ 4.5%)
(e) $300000 ($1140000 ÷ 3.8)
(f) 17.1% (4.5% × 3.8)
(g) $102000 ($680000 × 15%)
(h) 10.0% ($102000 ÷ $1020000)
(i) 1.5 ($1020000 ÷ $680000)
(j) 16.0% ($89600 ÷ $560000)
(k) 8.0% ($89600 ÷ $1120000)
(l) 2.0 ($1120000 ÷ $560000)

b. Determine the residual income for each division, assuming that the minimum acceptable rate of return established by management is 12%.

North Division: $18920 [$60200 – ($344000 × 12%)]
South Division: $15300 [$51300 – ($300000 × 12%)]
East Division: $20400 [$102000 – ($680000 × 12%)]
West Division: $22400 [$89600 – ($560000 × 12%)]

c. Which division is the most profitable in terms of (1) return on investment and (2) residual income?

(1) The North Division has the highest return on investment (17.5%).
(2) The West Division has the largest residual income. ($22400)