Dsoft manufactures PC’s. The company’s Notebook Division reports the following results for the current year:
Sales Revenue $2,000,000
Operating Income $500,000
Average Operating Assets $5,000,000
Dsoft’s management’s required rate of return on invested capital is 10%. Compute the Notebook Division’s operating margin, operating asset turnover, ROI, & Residual Income for the current year.
To compute the Notebook Division's operating margin, operating asset turnover, return on investment (ROI), and residual income, we'll need to use the given information and formulas for each metric.
1. Operating Margin:
The operating margin measures the profitability of the division by calculating the operating income as a percentage of the sales revenue.
Formula: Operating Margin = (Operating Income / Sales Revenue) × 100
Operating Margin = (500,000 / 2,000,000) × 100
Operating Margin = 25%
Therefore, the Notebook Division's operating margin is 25%.
2. Operating Asset Turnover:
The operating asset turnover measures how efficiently the division utilizes its average operating assets to generate sales.
Formula: Operating Asset Turnover = Sales Revenue / Average Operating Assets
Operating Asset Turnover = 2,000,000 / 5,000,000
Operating Asset Turnover = 0.4
Therefore, the Notebook Division's operating asset turnover is 0.4.
3. Return on Investment (ROI):
ROI is a measure of profitability that combines both the operating margin and operating asset turnover.
Formula: ROI = Operating Margin × Operating Asset Turnover
ROI = 0.25 × 0.4
ROI = 0.1 or 10%
Therefore, the Notebook Division's ROI is 10%.
4. Residual Income:
Residual income measures the division's operating income in excess of the required rate of return on invested capital.
Formula: Residual Income = Operating Income - (Average Operating Assets × Required Rate of Return)
Required Rate of Return = 10% of Average Operating Assets = 0.1 × 5,000,000 = $500,000
Residual Income = 500,000 - 500,000
Residual Income = $0
Therefore, the Notebook Division's residual income for the current year is $0.
These calculations demonstrate the performance metrics of the Notebook Division using the provided information and relevant formulas.