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Simple ROI and residual Income calculations

DIVISION
______________________________________
X Y Z

Invested capital $2,000,000 $_________ $1,250,000
Income $________ $ 182,000 $ 150,000
Revenue $4,000,000 $3,640,000 $________
Income % of revenue $ 2.5% _________% ________%
Capitol turnover __________ _________ 3
Rate of return on
invested capital _________% _______14% _________%

1. Prepare a similiar tabular presentation, filling in all blanks.
2. Which division is the best performer?
3. Suppose each division is assessed an imputed interest rate of 12% on invested captial, compute the residual income for each division.

Solution Preview

Hello!
Question 1
In order to fill in the blanks, we need to make use of the following identities:

1. Income % of Revenue = (Income/Revenue)*100

2. Capital Turnover = Revenue/Capital

3. Rate of Return on Invested Capital = (Income/Capital)*100

So let's calculate the blanks for each division.

- Division X
We need to find Income. Using identity 1, we have:

2.5 = (Income/4,000,000)*100

Income = 2.5*4,000,000/100 = $100,000

So Income is $100,000 for division X.

Using identity 2, we find Capital Turnover:

Capital Turnover = 4,000,000/2,000,000 = 2

Finally, using identity 3, we ...

Solution Summary

Simple ROI and residual Income calculations are achieved.

$2.19