Question

Zylex Corporation has multiple factories across the United States. The upper management at Zylex evaluates each factory based on the capital turnover ratio from the DuPont system. The following is information for the factory in Pennsylvania for the past year.

Sales	$	3,600,000
Operating expenses		1,200,000
Total assets (prior to subtracting accumulated depreciation)		8,000,000
Accumulated depreciation		2,000,000

a. Compute the ROI for the Pennsylvania factory using total assets and assets net of depreciation.

b. Find residual income if the company expects a 25 percent return on total assets.

c. Is the Pennsylvania factory performing up to management’s expectations?

Answer 1

a)
ROI=NET PROFIT/INVESTMENT*100
sales	3,600,000.00
less:operating expense	1,200,000.00
Net profit	2,400,000.00
total assets before accumulated depreciation	8,000,000.00
less:accumulated depreciation	2,000,000.00
Net Assets	6,000,000.00
ROI using total assets	2400000/8000000*100
	30%
ROI using assets net of depreciation	2400000/6000000*100
	40%
b)RESIDUAL INCOME=TOTAL ASSETS*25%
=8000000*25%	2,000,000.00
C)Pennsylvania factory IS performing up to management’s expectations because
its ROI is more than residual income and companys return is more than its expectation that is its net profit is 2400000 and residual
income is 2000000