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# Margin, Turnover, ROI, Cost of Capital, Residual Income

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1. (a) Maria Stanford oversees her company's largest and most profitable investment center. She has asked you, as her staff accountant, to compute the center's ROI, residual income and EVA for the month of August, using the following information:
August 2001 operating income \$300,000
August 2001 sales 450,000
Assets at 7/31/01 500,000
Assets at 8/31/01 510,000

August 2001 income taxes 90,000
Current liabilities at 8/3/01 250,000
Cost of capital 19%
Desired ROI 52%

(b) Using your answers in part (a) explain the significance of margin, turnover, ROI, cost of capital, residual income and EVA. Discuss in detail the advantages and disadvantages of using margin, turnover, ROI, residual income and EVA .
Using the following information prepare a traditional income state and a variable costing income statement.
Sales \$2,000,000
Variable cost of goods sold 900,000
Variable selling expenses 500,000
Fixed selling expenses 100,000
Fixed manufacturing costs 50,000

##### Solution Summary

For the traditional income state and a variable costing income statement, see attached in Excel (separate tab). A pro and con is given (bullet format, not paragraph write up) for each.

##### Solution Preview

See attached excel sheet for computations of operating margin, ROI, residual income and EVA.

One pro and one con for each of the measures is given below to get you started with your discussion.

Operating margin:

Pro: Measures ability to perform in ...

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• BSc, University of Virginia
• MSc, University of Virginia
• PhD, Georgia State University
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