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Our company reported the following financial numbers for one of its divisions for the year; average total assets of $4,100,000; @5 $4,525,000; @5 @5 goods sold of $2,550,000; and operating expenses of $1,322,000
Our company reported the following financial numbers for one of its divisions for the year; average total assets of $4,100,000; @5 $4,525,000; @5 @5 goods sold of $2,550,000; and operating expenses of $1,322,000. Assume a target income @5 10% of average invested assets.
Compute residual income for the division:
The investment center profit margin is:
Select I
The investment turnover is:
Select I
Expert Solution
1) Computation of Residual Income for the Division:
Residual Income = Net Income - (Average Operating Assets * Return)
Here,
Net Income = Sales - Cost of Goods Sold - Operating Expenses
= $4,525,000 - $2,550,000 - $1,372,000
Net Income = $603,000
Average Operating Assets = $4,100,000
Return = 10%
Residual Income = $603,000 - ($4,100,000*10%)
= $603,000 - $193,000
Residual Income = $410,000
Computation of Investment center Profit margin :
Investment center Profit margin = ((Sales - Total Expenses) / Revenue) * 100
Here,
Total Expenses = COGS + Operating expenses
= $2,550,000 + $1,372,000
= $3,922,000
Investment center Profit margin = [($4,525,000 - $3,922,000) / $4,525,000] * 100
= ($603,000 / $4,525,000) * 100
= 13.3%
Computation of Investment Turnover Ratio:
Investment Turnover Ratio = Total Sales / Average Total Assets
= $4,525,000/$4,100,000
Investment Turnover Ratio = 1.10
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