Question

Exercise 9-1 Compute the Return on Investment (ROI) [LO9-1]

Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below:

Sales	$	18,800,000
Net operating income	$	5,200,000
Average operating assets	$	36,300,000

Required:
1.	Compute the margin for Alyeska Services Company. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin %

2.	Compute the turnover for Alyeska Services Company. (Round your answer to 2 decimal places.) Turnover

3.	Compute the return on investment (ROI) for Alyeska Services Company. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34). ROI %

Exercise 9-2 Residual Income [LO9-2]

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $450,000 on sales of $1,900,000. The company’s average operating assets for the year were $2,100,000 and its minimum required rate of return was 11%.

Required:

Compute the company’s residual income for the year. Average operating assets Net operating income Minimum required return Residual income

Exercise 9-5 Return on Investment (ROI) [LO9-1]

Provide the missing data in the following table for a distributor of martial arts products: (Enter your Margin and ROI answers to the nearest percentage (i.e., 0.123 should be entered as 12).) Division Alpha Bravo Charlie Sales ? $280,000 ? Net operating income ? $39,200 $38,870 Average operating assets $438,000 ? ? Margin 7 % ? % 13 % Turnover 4 ? ? Return on investment (ROI) ? % 28 % 13 %

Answer 1

Exercise 9-1

1. Margin = Net Operating Income / Sales

  $5200000 / $ 18800000 = 27.66%

2. Turnover = Sales / Average Operating Assets

$18800000/ $ 36300000 = 0.52

3. ROI = Margin x Turnover

27.62% x 0.52 = 14.36%

Exercise 9-2

Residual Income = Net Operating Income - ( Minimum Return Required On Assets x Average Operating Assets)

Average Operating Assets	$2100000
Net Operating Income	$450000
Minimum Required Return	11%
Residual Income	$450000-($ 2100000*11%)= $219000

Exercise 9-5

Division

Alpha

Bravo

Charlie

Sales

$1752000 (Refer note 1)

$280,000

$299000 ( Refer note 7)

Net operating income

$12264000 ( Refer note 2)

$39,200

$38,870

Average operating assets

$438,000

$140000( Refer note 6)

$299000 (Refer note 8)

Margin

7

%

14% ( Refer Note 4)

%

13

%

Turnover

4

2 (Refer note 5)

1 (Refer note 8)

Return on investment (ROI)

28% ( Refer note 3)

%

28

%

13

%

1

Turnover= Sales / Average Operating Assets

4. Margin = Net Operating Income / Sales

7. Margin = Net Operating Income / Sales

4= sales/438000

$39200/$280000= 14%

13= $38870 / Sales

Sales = $438000*4 = $1752000

Sales = $299000

5. ROI = Margin x Turnover

2

Margin= Net Operating Income / Sales

28 = 14* Turnover

8. ROI = Margin x Turnover

7% = NOI / 1752000

Turnover= 2

13 = 13* Turnover

NOI = $1752000 * 7 = $12264000

Turnover = 1

6. Turnover = Sales /Average Operating Assets

3

ROI = Margin x Turnover

2= $280000/ Avg OA

9. Turnover = Sales /Average Operating Assets

7*4 =28%

Average operating assets = $140000

1= $299000 / Avg OA

Average Operating assets = $299000