29CP Question: Using ROI and RI to ev... [FREE SOLUTION]

Chapter 24: 29CP (page 1367)

Question: Using ROI and RI to evaluate investment centers
This problem continues the Piedmont Computer Company situation from Chapter 23. Piedmont Computer Company reported 2020 sales of $3,600,000 and operating income of $183,600. Average total assets during 2020 were $600,000. Piedmont Computer Company鈥檚 target rate of return is 16%.
Calculate Piedmont Computer Company鈥檚 profit margin ratio, asset turnover ratio, ROI, and RI for 2020. Comment on the results.

Short Answer

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Answer

Company鈥檚 profit margin ratio is 0.051 or 5.1%. It means of the sales revenue i.e., 100%, 5.1% is left as net income after meeting cost of goods sold and all operating expenses.

Company鈥檚 asset turnover ratio 6:1 it shows the efficiency of asset to generate sales revenue.

Return on investment of the company for the year is 30.6% and residual income is $87,600.

Step by step solution

Step 1:

$Profit margin ratio = \frac{Net income}{Net sales revenue} = \frac{$ 183, 600}{$ 3, 600.000} = 0.051$

Step 2:

$Asset Turnover Ratio = \frac{Net Sales}{Average Total Assets} = \frac{$ 3, 600, 000}{$ 600, 000} = 6$

Step 3:

$ROI = \frac{Net income}{Average total asset} 脳 100 = \frac{$ 183, 600}{$ 600, 000} 脳 100 = 30.6 %$

Step 4:

$Residual Income = Operating income - (Minimum required rate of return 脳 Average operating assets) = $ 183, 600 - (16 % 脳 $ 600, 000) = $ 183, 600 - $ 96, 000 = $ 87, 600$

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