Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	133,000		$	134,000
Accounts receivable		337,000			475,000
Inventory		572,000			472,000
Plant and equipment, net		858,000			859,000
Investment in Buisson, S.A.		393,000			426,000
Land (undeveloped)		246,000			253,000
Total assets	$	2,539,000		$	2,619,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000		$	342,000
Long-term debt		1,035,000			1,035,000
Stockholders' equity		1,130,000			1,242,000
Total liabilities and stockholders' equity	$	2,539,000		$	2,619,000

Joel de Paris, Inc. Income Statement
Sales					$	3,840,000
Operating expenses						3,187,200
Net operating income						652,800
Interest and taxes:
Interest expense	$	117,000
Tax expense		207,000				324,000
Net income					$	328,800

The company paid dividends of $216,800 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

Answer 1

Answer:
Particulars	Beginning Balance ($)	Ending Balance ($)
Cash	$ 133,000	$ 134,000
Accounts Receivable	$ 337,000	$ 475,000
Inventory	$ 572,000	$ 472,000
Plant and Equipment	$ 858,000	$ 859,000
Total Operating Assets	$ 1,900,000	$ 1,940,000
1)
Average operating assets    =    (Beginning + Ending ) / 2	( $ 1,900,000 + $ 1,940,000) / 2	$ 1,920,000
2)
Margin         = Net Operating income /Sales	$ 652,800 /    $ 3,840,000 =	17%
Turnover      = Sales / Average operating assets	$ 3,840,000 / $ 1,920,000 =	2 times
Return on investment (ROI)      = Margin x Turnover	17% x 2 times =	34%
3)
Residual income = Net operating income (-) Required return	$ 652,800 (-) $ 288,000 =	$ 364,800
Required return     = Average operating assets x 15%	$ 288,000