Question

Sterling, Inc. reports the following financial information for its sports clothing segment. Average operating assets $3,064,000 Controllable margin $643,440 Minimum rate of return 7 % Compute the return on investment and the residual income.

Answer 1

Answer:

Return on investment = 21%

Residual Income = $428,960

Explanation:

Average operating assets (AOA) = $3,064,000

Controllable margin (CM) = $643,440

Minimum rate of return (MRR) = 7 %

The return on investment is the ratio between the controllable margin (CM) and the average operating assets (AOA):

$ROI = \frac{CM}{AOA} =\frac{643,440}{3,064,000} \\ROI = 0.21 =21\%$

The residual income is given by:

Residual Income = CM - (MRR × AOA)

$RI=643,440 -(0.07*3,064,000)\\RI=\ 428,960$