Question

Tru-Green Industries has two product lines of sprinklers that it manufactures: Oscillating and Rotary. The following is an income statement for each of the two product lines and for the total company for the year ended December 31, 2019:

	Oscillating	Rotary	Total
Sales	$745,000	$695,000	$1,440,000
Cost of Goods Sold	(503,000)	(512,500)	(1,015,500)
Sales Commission	(47,000)	(44,000)	(91,000)
Contribution Margin	195,000	138,500	333,500
Advertising expense (specific to each individual segment)	(27,000)	(7,500)	(34,500)
General Fixed Operations Expense	(45,000)	(30,000)	(75,000)
Operating income	$123,000	$101,000	$224,000

Tru-Green Industries has a desired rate of return of 10%. Operating assets for each product line and the total operating assets for the company for 2019 are as follow:

Product Line	Operating Assets
Oscillating	$940,000
Rotary	$975,000
Total	$1,915,000

Required:

1. What is the return on investment for each product line and for the entire company?

2. What is the margin for each product line and for the company?

3. Which product line is most profitable and why?

4. What is the residual income of each product line and of the entire company?

Answer 1

Question 1:-

Return on investment for each product line is calculated using the following formula:-

(Operating Income/Average total assets) * 100

Oscillating = ($123,000/$940,000) * 100 = 13.09%

Rotary = ($101,000/$975,000) * 100 = 10.36%

Company = ($123,000 + $101,000/$940,000 + $975,000) = 11.70%

Question 2:-

Margin for the each product:-

(Operating Income/Sales) * 100

Oscillating = ($123,000/$745,000) * 100 = 16.51%

Rotary = ($101,000/$695,000) * 100 = 14.53%

Company = ($123,000 + $101,000/$745,000 + $695,000) = 15.56%

Question 3:-

The product line that is most profitable is Oscillating because it has a higher Margin in comparison to the Rotary. The Oscillating product line has a Margin of 16.51% in comparison to Rotary which has a margin of 14.53%

Question 4:-

Residual income = Operating Income - (Required Rate of return * Operating Assets)

Oscillating = $123,000 - (10% * $940,000) = $123,000 - $94,000 = $29,000

Rotary = $101,000 - (10% * $975,000) = $101,000 - $97,500 = $3,500

Company = $224,000 - (10% of $940,000 + $975,000) = $224,000 - (10% * $1,915,000) = $224,000 - $191,500 = $32,500