# Accounting – Exercise 12-14

1.

Cornerstone Exercise 12-14 (Algorithmic)
Calculating Residual Income

Pelican Manufacturing earned operating income last year as shown in the following income statement:

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 Sales \$531,250 Cost of goods sold 280,000 Gross margin \$251,250 Selling and administrative expense 184,700 Operating income \$66,550

At the beginning of the year, the value of operating assets was \$390,000. At the end of the year, the value of operating assets was \$460,000. Pelican requires a minimum rate of return of 10 percent.

For Pelican, calculate:

 1. Average operating assets \$   _________________ 2. Residual income \$   _________________

2.
 Cornerstone Exercise 12-15 (Algorithmic) Calculating Economic Value Added East Mullett Manufacturing earned net income last year as shown in the following income statement: Total capital employed equaled \$389,000. East Mullett’s actual cost of capital is 8 percent. Calculate the EVA for East Mullett Manufacturing. If required, round your answer to nearest whole number.\$   _________________

3.
 eBookeBookeBook Exercise 12-23 (Algorithmic) The Home Products Division of Schipper Company had operating income last year of \$112,400 and operating assets of \$750,000. Schipper’s minimum acceptable rate of return is 10 percent. Calculate the residual income for the Home Products Division. Round your answer to the nearest dollar. Residual income = \$   _________________

4.

Problem 12-34
Return on Investment and Investment Decisions

You may use the attached spreadsheet to help you complete this activity, but you are not required to do so. You will find the spreadsheet by clicking on the link in the drop-down menu above.

Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.

The budgeted income of the division was \$725,000 with operating assets of \$3,625,000. The proposed investment would add income of \$640,000 and would require an additional investment in equipment of \$4,000,000. The minimum required return on investment for the company is 12 percent. If required, round your answers to two decimal places.

1.  Compute the ROI of the following (in percent):

 a. The division if the radio project is not undertaken. _________________   % b. The radio project alone. _________________   % c. The division if the radio project is undertaken. _________________   %

2.  Compute the residual income of the following:

 a. The division if the radio project is not undertaken. \$     _________________ b. The radio project alone. \$     _________________ c. The division if the radio project is undertaken. \$     _________________

3.  Conceptual Connection: Do you suppose that Leslie will decide to invest in the new radio? Why or why not?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.
_________________

5.
eBookeBookeBook

Problem 12-36
Return on Investment for Multiple Investments, Residual Income

Links to learning objectives referenced by this question can be accessed in the “Additional Resources” drop-down menu above.

The manager of a division that produces add-on products for the automobile industry has just been presented the opportunity to invest in two independent projects. The first is an air conditioner for the back seats of vans and minivans. The second is a turbocharger. Without the investments, the division will have average assets for the coming year of \$28.9 million and expected operating income of \$4.335 million. The outlay required for each investment and the expected operating incomes are as follows:

1.  Compute the ROI for each investment project. Round to two decimal places.

 Air conditioner, ROI _________________   % Turbocharger, ROI _________________   %

2.  Compute the budgeted divisional ROI for each of the following four alternatives. Round to two decimal places.

 a. The air conditioner investment is made. _________________   % b. The turbocharger investment is made. _________________   % c. Both investments are made. _________________   % d. Neither additional investment is made. _________________   %

3.  Conceptual Connection: Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?
_________________

4.  Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 14 percent. Calculate the residual income for each of the following four alternatives:

 a. The air conditioner investment is made. \$     _________________ b. The turbocharger investment is made. \$     _________________ c. Both investments are made. \$     _________________ d. Neither additional investment is made. \$     _________________

Based on residual income, which investment(s) will the manager make?
_________________

5.  Conceptual Connection: Suppose that the company sets a minimum required rate of return equal to 10 percent. Calculate the residual income for each of the following four alternatives:

 a. The air conditioner investment is made. \$     _________________ b. The turbocharger investment is made. \$     _________________ c. Both investments are made. \$     _________________ d. Neither additional investment is made. \$     _________________

Based on residual income, which investment(s) will the manager make?
_________________