In: Accounting
Assume division 1 of the XYZ Company had the following results as of 12/31/2020: Management’s hurdle rate is 8%
Sales (CR) |
$5,000,000 |
Operating Income (CI) |
1,000,000 |
Total assets (CA) |
10,000,000 |
21. What is the division’s Return on Investment (ROI)?
22. What is the division’s margin?
23. What is the division’s turnover?
24. What is the division’s Residual Income (RI)?
Given,
Sales(CR) = $50,00,000
Operating Income(CI) = $10,00,000
Total Asset (CA) = $100,00,000
Hurdle Rate =8%
Answer to Question 1:
Return on Investment = Operating Income/ Total Asset
= ($10,00,000/ $100,00,000)*100
=10%
Answer to Question 2:
(Revenue)Sales(CR) = $50,00,000
Operating Income(CI) = $10,00,000
Division Margin = Operating Income/ Revenues
= ($10,00,000/ $50,00,000)*100
= 20%
Answer to Question 3:
(Revenue)Sales(CR) = $50,00,000
Total Asset (CA) = $100,00,000
Division's Turnover = (Total Revenue/ Total Asset )*100
=($50,00,000/ $100,00,000) *100
= 50%
Answer to Question 4:
Residual Income is the difference between the actual income and the required return on investment.
Actual Operating Income = $10,00,000
Total Asset (CA) = $100,00,000
Return on Investment = 10%
Required Return on Investment= Total Asset * Return on Investment
= $100,00,000 * 10%
= $10,00,000
Residual Income = Actual Operating Income - Required Return on Investment
= $10,00,000 - $10,00,000
= $0