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Return on Investment and Residual Income Johnson Company has two sources of funds: long-term debt and...

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Accounting

Return on Investment and Residual Income
Johnson Company has two sources of funds: long-term debt and equitycapital. Johnson Company has profit centers in the followinglocations with the following net incomes and total assets:

Net IncomeAssets
Las Vegas$1,310,000$4,000,000
Dallas1,550,0008,000,000
Tampa2,390,00012,000,000

a. Calculate ROI for each profit center and rank them fromhighest to lowest based on ROI.

Round ROI to the nearest whole percentage.

ROIRank
Las VegasAnswerAnswer
DallasAnswerAnswer
TampaAnswerAnswer

b. Calculate residual income for each profit center based on adesired ROI of 5% and rank them from highest to lowest based onresidual income.

ROIRank
Las VegasAnswerAnswer
DallasAnswerAnswer
TampaAnswerAnswer

Answer & Explanation Solved by verified expert
3.7 Ratings (449 Votes)

(a)

Return on investment ( Net income/ Assets)

Net Income Assets Return on investment ( Net income/ Assets)
Las Vegas $1,310,000 $4,000,000 1,310,000/4,000,000 = 33%
Dallas 1,550,000 8,000,000 1,550,000/8,000,000 = 19%
Tampa 2,390,000 12,000,000 2,390,000/12,000,000 = 20%
Return on investment Rank
Las Vegas 33% 1
Dallas 19% 3
Tampa 20% 2

(b)

Required rate of return = 5%

Residual income = Net Income - ( Assets x Required rate of return)

Net Income Assets Residual income = Net Income - ( Assets x Required rate of return)
Las Vegas $1,310,000 $4,000,000 1,310,000- (4,000,000 x 5%)= 1,110,000
Dallas 1,550,000 8,000,000 1,550,000- (8,000,000 x 5%)= 1,150,000
Tampa 2,390,000 12,000,000 2,390,000 - (12,000,000 x 5%)= 1,790,000
Residual income Rank
Las Vegas                                                            1,110,000 3
Dallas                                                      1,150,000 2
Tampa                                                      1,790,000 1

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