The balance sheet for the New Products Division of NuBone Corporation showed invested assets of $200,000 at

Question:

The balance sheet for the New Products Division of NuBone Corporation showed invested assets of $200,000 at the beginning of the year and $300,000 at the end of the year. During the year, the division’s operating income was $12,500 on sales of $500,000.

Required

1. Compute the division’s residual income if the desired ROI is 6 percent.

2. Compute the following performance measures for the division:

(a) Profit margin,

(b) Asset turnover, and

3. Recompute the division’s ROI under each of the following independent assumptions:

a. Sales increase from $500,000 to $600,000, causing operating income to rise from $12,500 to $30,000.

b. Invested assets at the beginning of the year are reduced from $200,000 to $100,000.

c. Operating expenses are reduced, causing operating income to rise from $12,500 to $20,000.

4. Compute NuBone’s EVA if total corporate assets are $500,000, current liabilities are $80,000, after-tax operating income is $50,000, and the cost of capital is 8 percent.

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