Question: How do I find the residual income here? I'm missing only the residual income and nothing else to be done besides that. Genmure Corporation is
How do I find the residual income here? I'm missing only the residual income and nothing else to be done besides that.
| Genmure Corporation is trying to analyze the results of three efficiency initiatives that were taken on the previous fiscal period. Below is data relating to these projects: | |||||||
| Factory Automation | |||||||
| Sales | $400,000 | ||||||
| Operating Expenses | 225,000 | ||||||
| Income Tax Expense | 30,000 | ||||||
| Average Assets Invested | 1,100,000 | ||||||
| Re-Certify Labor Force | |||||||
| Sales | $290,000 | ||||||
| Operating Expenses | 265,000 | ||||||
| Income Tax Expense | 4,000 | ||||||
| Average Assets Invested | 125,000 | ||||||
| Update Tools and Equipment | |||||||
| Sales | $142,000 | ||||||
| Operating Expenses | 48,000 | ||||||
| Income Tax Expense | 18,000 | ||||||
| Average Assets Invested | 500,000 | ||||||
| Hurdle Rate: | 12% | ||||||
| Required: | |||||||
| Determine the Margin, Turnover, Return on Investment, and Residual Income for each initiative. | |||||||
| Factory Automation | |||||||
| Margin | 43.8% | ||||||
| Turnover | 0.36 | ||||||
| Return on Investment (ROI) | 15.9% | ||||||
| Residual Income (RI) | $43,000 | ||||||
| Re-Certify Labor Force | |||||||
| Margin | 8.6% | ||||||
| Turnover | 2.32 | ||||||
| Return on Investment (ROI) | 20.0% | ||||||
| Residual Income (RI) | $10,000 | ||||||
| Update Tools and Equipment | |||||||
| Margin | 66.2% | ||||||
| Turnover | 0.28 | ||||||
| Return on Investment (ROI) | 18.8% | ||||||
| Residual Income (RI) | $34,000 | ||||||
| Which initiative outperformed the others on the basis of Return on Investment? | Re-Certify Labor Force | ||||||
| Which initiative outperformed the others on the basis of Residual Income? | Factory Automation | ||||||
| Management is pleased with the results of the last year and is offering additional resources to continue the positive trend with the initiatives. | |||||||
| Additional Assets to Invest | $325,000 | ||||||
| Increase to Sales | 30% | ||||||
| Increase to Operating Expenses | 15% | ||||||
| Required: | |||||||
| Recalculate the amounts with management's additional funding. Assume Income Tax remains the same. | |||||||
| Determine the Margin, Turnover, Return on Investment, and Residual Income for each initiative with management's additional funding. | |||||||
| Factory Automation | |||||||
| Sales | $520,000 | ||||||
| Operating Expenses | 258,750 | ||||||
| Income Tax Expense | 30,000 | ||||||
| Average Assets Invested | 1,425,000 | ||||||
| Re-Certify Labor Force | |||||||
| Sales | $377,000 | ||||||
| Operating Expenses | 304,750 | ||||||
| Income Tax Expense | 4,000 | ||||||
| Average Assets Invested | 450,000 | ||||||
| Update Tools and Equipment | |||||||
| Sales | $184,600 | ||||||
| Operating Expenses | 55,200 | ||||||
| Income Tax Expense | 18,000 | ||||||
| Average Assets Invested | 825,000 | ||||||
| Factory Automation | |||||||
| Margin | 50.2% | ||||||
| Turnover | 0.36 | ||||||
| Return on Investment (ROI) | 18.3% | ||||||
| Residual Income (RI) | x | ||||||
| Re-Certify Labor Force | |||||||
| Margin | 19.2% | ||||||
| Turnover | 0.84 | ||||||
| Return on Investment (ROI) | 16.1% | ||||||
| Residual Income (RI) | x | ||||||
| Update Tools and Equipment | |||||||
| Margin | 70.1% | ||||||
| Turnover | 0.22 | ||||||
| Return on Investment (ROI) | 15.7% | ||||||
| Residual Income (RI) | x | ||||||
| If the manager for the labor force's performance uses ROI, would the manager accept the management's funding? | No | ||||||
| If the manager for the Tools and Equipment's performance uses Residual Income, would the manager accept the management's funding? | No | ||||||
| If the manager for Factory Automation's performance uses Return on Investment, would the manager accept the management's funding? | Yes | ||||||
| If the manager for Factory Automation's performance uses Residual Income, would the manager accept the management's funding? | Yes |
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