167) The Clipper Corporation had net operating income of $380,000 and average operating
assets of $2,000,000. The corporation requires a return on investment of 18%.
Required:
a. Calculate the company’s return on investment (ROI) and residual income (RI).
b. Clipper Corporation is considering an investment of $70,000 in a project that will generate
annual net operating income of $12,950. Would it be in the best interests of the company to
make this investment?
c. Clipper Corporation is considering an investment of $70,000 in a project that will generate
annual net operating income of $12,950. If the division planning to make the investment
currently has a return on investment of 20% and its manager is evaluated based on the division’s
ROI, will the division manager be inclined to request funds to make this investment?
d. Clipper Corporation is considering an investment of $70,000 in a project that will generate
annual net operating income of $12,950. If the division planning to make the investment
currently has a residual income of $50,000 and its manager is evaluated based on the division’s
residual income, will the division manager be inclined to request funds to make this investment?
139
168) Financial data for Beaker Company for last year appear below:
Beaker Company
Statements of Financial Position
Beginning Balance
Ending Balance
Assets:
Cash
$
50,000
$
Accounts receivable
20,000
Inventory
30,000
Plant and equipment (net)
120,000
Investment in Cedar Company
80,000
Land (undeveloped)
170,000
Total assets
$
470,000
$
Liabilities and owners’ equity:
Accounts payable
$
70,000
$
Long-term debt
250,000
Owners’ equity
150,000
Total liabilities and owners’ equity
$
470,000
$
–
Beaker Company
Income Statement
Sales
$
414,000
Less operating expenses
351,900
Net operating income
62,100
Less interest and taxes:
Interest expense
$
30,000
Tax expense
10,000
40,000
Net income
$
22,100
–
The company paid dividends of $2,100 last year. The “Investment in Cedar Company” on the
statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company’s margin, turnover, and return on investment for last year.
b. The Board of Directors of Beaker Company has set a minimum required return of 20%. What
was the company’s residual income last year?
141
169) Eady Wares is a division of a major corporation. The following data are for the latest year
of operations:
Sales
$
19,600,000
Net operating income
$
470,400
Average operating assets
$
5,000,000
The company’s minimum required rate of return
10
%
–
Required:
a. What is the division’s margin?
b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)?
d. What is the division’s residual income?
142
170) Fabbri Wares is a division of a major corporation. The following data are for the latest year
of operations:
Sales
$
9,540,000
Net operating income
$
1,163,880
Average operating assets
$
3,000,000
The company’s minimum required rate of return
14
%
–
Required:
a. What is the division’s return on investment (ROI)?
b. What is the division’s residual income?
143
171) Ranallo Inc. reported the following results from last year’s operations:
Sales
$11,400,000
Variable expenses
7,480,000
Contribution margin
3,920,000
Fixed expenses
3,008,000
Net operating income
$912,000
Average operating assets
$6,000,000
At the beginning of this year, the company has a $1,800,000 investment opportunity with the
following characteristics:
Sales
$3,600,000
Contribution margin ratio
40%
of sales
Fixed expenses
$1,116,000
The company’s minimum required rate of return is 14%.
Required:
1. What was last year’s margin? (Round to the nearest 0.1%.)
2. What was last year’s turnover? (Round to the nearest 0.01.)
3. What was last year’s return on investment (ROI)? (Round to the nearest 0.1%.)
4. What is the margin related to this year’s investment opportunity? (Round to the nearest 0.1%.)
5. What is the turnover related to this year’s investment opportunity? (Round to the nearest 0.01.)
6. What is the ROI related to this year’s investment opportunity? (Round to the nearest 0.1%.)
7. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall margin this year? (Round to the nearest 0.1%.)
8. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall turnover this year? (Round to the nearest 0.01.)
9. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall ROI will this year? (Round to the nearest 0.1%.)
10. If Westerville’s chief executive officer earns a bonus only if the ROI for this year exceeds the
ROI for last year, would the CEO pursue the investment opportunity? Would the owners of the
company want the CEO to pursue the investment opportunity?
11. What was last year’s residual income?
12. What is the residual income of this year’s investment opportunity?
13. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall residual income this year?
14. If Westerville’s CEO earns a bonus only if residual income for this year exceeds residual
income for last year, would the CEO pursue the investment opportunity?
144
145
146
172) Willing Inc. reported the following results from last year’s operations:
Sales
$11,400,000
Variable expenses
8,540,000
Contribution margin
2,860,000
Fixed expenses
1,948,000
Net operating income
$912,000
Average operating assets
$6,000,000
At the beginning of this year, the company has a $1,200,000 investment opportunity with the
following characteristics:
Sales
$2,400,000
Contribution margin ratio
40%
of sales
Fixed expenses
$744,000
The company’s minimum required rate of return is 14%.
Required:
1. What was last year’s residual income?
2. What is the residual income of this year’s investment opportunity?
3. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall residual income this year?
4. If Westerville’s CEO earns a bonus only if residual income for this year exceeds residual
income for last year, would the CEO pursue the investment opportunity?
Average operating assets
$6,000,000
Net operating income
$912,000
Minimum required return ($6,000,000 × 14%)
Residual income
Contribution margin (40% × $2,400,000)
Fixed expenses
Net operating income
Average operating assets
$1,200,000
Net operating income
$216,000
Minimum required return ($1,200,000 × 14%)
Residual income
173) The Casket Division of Saal Corporation had average operating assets of $950,000 and net
operating income of $135,200 in January. The company uses residual income to evaluate the
performance of its divisions, with a minimum required rate of return of 13%.
Required:
What was the Casket Division’s residual income in January?
148
174) Ibale Industries is a division of a major corporation. The following data are for the latest
year of operations:
Sales
$
29,960,000
Net operating income
$
1,827,560
Average operating assets
$
7,000,000
The company’s minimum required rate of return
10
%
–
Required:
What is the division’s residual income?
149
175) Brodrick Corporation uses residual income to evaluate the performance of its divisions. The
minimum required rate of return for performance evaluation purposes is 19%. The Games
Division had average operating assets of $140,000 and net operating income of $25,900 in
August.
Required:
What was the Games Division’s residual income in August?
150
176) Worley Inc. reported the following results from last year’s operations:
Sales
$13,200,000
Variable expenses
8,490,000
Contribution margin
4,710,000
Fixed expenses
3,654,000
Net operating income
$1,056,000
Average operating assets
$6,000,000
At the beginning of this year, the company has a $1,000,000 investment opportunity with the
following characteristics:
Sales
$3,400,000
Contribution margin ratio
50%
of sales
Fixed expenses
$1,496,000
The company’s minimum required rate of return is 17%.
Required:
1. What was last year’s residual income?
2. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall residual income this year?
3. If Westerville’s CEO earns a bonus only if residual income for this year exceeds residual
income for last year, would the CEO pursue the investment opportunity?
Average operating assets
$6,000,000
Net operating income
$1,056,000
Minimum required return ($6,000,000 × 17%)
1,020,000
Residual income
is:
Contribution margin (50% × $3,400,000)
Fixed expenses
Net operating income
Average operating assets
$7,000,000
Net operating income
$1,260,000
Minimum required return ($7,000,000 × 17%)
1,190,000
Residual income
151
3. The CEO would pursue the investment opportunity because residual income would increase
by $34,000.
Difficulty: 1 Easy
Topic: Return on Investment
Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in
sales, expenses, and assets affect ROI.
Bloom’s: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
177) Schurz Corporation’s management reports that its average delivery cycle time is 26.7 days,
its average throughput time is 10.0 days, its manufacturing cycle efficiency (MCE) is 0.22, its
average move time is 0.6 day, and its average queue time is 6.7 days.
Required:
a. What is the wait time?
b. What is the process time?
c. What is the inspection time?
178) Schlarbaum Corporation’s management keeps track of the time it takes to process orders.
During the most recent month, the following average times were recorded per order:
Days
Wait time
3.7
Inspection time
0.2
Process time
1.3
Move time
0.8
Queue time
6.9
–
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time.
153
179) During the most recent month at Schwab Corporation, queue time was 7.8 days, inspection
time was 0.3 day, process time was 1.3 days, wait time was 9.7 days, and move time was 0.7
day.
Required:
a. Compute the throughput time.
b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?
d. Compute the delivery cycle time.
154
180) Alghamdi Corporation keeps careful track of the time required to fill orders. The times
required for a particular order appear below:
Hours
Wait time
10.4
Process time
1.1
Inspection time
0.1
Move time
2.4
Queue time
9.3
–
Required:
a. Determine the throughput time.
b. Determine the manufacturing cycle efficiency (MCE).
c. Determine the delivery cycle time.