McBreen Company has income from operations of $96,000, invested assets of $400,000, and sales of $1,200,000

McBreen Company has income from operations of $96,000, invested assets of $400,000, and sales of $1,200,000. Use the DuPont formula to compute the rate of return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the rate  of return on investment.

Answer:

a. Profit Margin = $96,000 ÷ $1,200,000 = 8.0% 

b. Investment Turnover = $1,200,000 ÷ $400,000 = 3.0 

c. Rate of Return on Investment = 8.0% × 3.0 = 24% 

Based on the data in Exercise 24-10, assume that management has established an 8% minimum acceptable rate of return for invested assets.

Based on the data in Exercise 24-10, assume that management has established an 8% minimum acceptable rate of return for invested assets.

a. Determine the residual income for each division.

b. Which division has the most residual income?


Answer:












Retail 
Division 
Commercial 
Division 
Internet 
Division 
Income from operations……………………………   $130,000 $72,000 $137,500 
Minimum amount of income from 
operations: 
 $650,000 × 8%……………………………………  52,000  
$400,000 × 8%…………………………………… 
$550,000 × 8%……………………………………     
32,000  
    44,000 
Residual income…………………………………… $  78,000 $40,000 $  93,500 

b. 

Internet Division