Chapter 24: Q4TI (page 1346)

Padgett Company has compiled the following data:
Net sales revenue $1,000,000
Operating income 60,000
Average total assets 400,000
Management’s target rate of return 12%
Compute the following amounts for Padgett:
Profit margin ratio
Asset turnover ratio
Return on investment
Residual income

Short Answer

Expert verified

The profit margin ratio of the company is6%.

The asset turnover ratio is2.5 times.

Return on investment is15%.

Residual income of the company is$12,000.

Step by step solution

Meaning of Operating income

Operating income refers to the income generated by a business concern from its core operations. It is computed by taking the difference betweensales revenue and associated costs such as variable and fixed.

Computation of profit margin ratio

$\begin{array}{rcl} P r o f i t m a r g i n r a t i o & = & \frac{O p e r a t i n g i n c o m e}{N e t s a l e s} \times 100 \\ = & \frac{$ 60, 000}{$ 1, 000, 000} \times 100 \\ = & 6 % \end{array}$

Computation of asset turnover ratio

$\begin{array}{rcl} A s s e t t u r n o v e r r a t i o & = & \frac{N e t s a l e s}{A v e r a g e t o t a l a s s e t s} \\ = & \frac{$ 1, 000, 000}{$ 400, 000} \\ = & 2.5 t i m e s \end{array}$

Computation of return on investment

$\begin{array}{rcl} R e t u r n o n i n v e s t m e n t & = & \frac{O p e r a t i n g i n c o m e}{A v e r a g e t o t a l a s s e t s} \times 100 \\ = & \frac{$ 60, 000}{$ 400, 000} \times 100 \\ = & 15 % \end{array}$

Computation of residual income

$\begin{array}{rcl} R e s i d u a l i n c o m e & = & O p e r a t i n g i n c o m e - (T a r g e t r a t e o f r e t u r n \times A v e r a g e t o t a l a s s e t s) \\ = & $ 60, 000 - (12 % \times $ 400, 000) \\ = & $ 60, 000 - $ 48, 000 \\ = & $ 12, 000 \end{array}$

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Padgett Company has compiled the following data:
Net sales revenue $1,000,000
Operating income 60,000
Average total assets 400,000
Management’s target rate of return 12%
Compute the following amounts for Padgett:
Profit margin ratio
Asset turnover ratio
Return on investment
Residual income

Short Answer

Step by step solution

Meaning of Operating income

Computation of profit margin ratio

Computation of asset turnover ratio

Computation of return on investment

Computation of residual income

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Corporate Finance

Influences On Business

Introduction to Business

Organizational Behavior

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Business Case Studies

Study anywhere. Anytime. Across all devices.

Padgett Company has compiled the following data:Net sales revenue $1,000,000Operating income 60,000 Average total assets 400,000Management’s target rate of return 12%Compute the following amounts for Padgett:Profit margin ratioAsset turnover ratio Return on investmentResidual income

Short Answer

Step by step solution

Meaning of Operating income

Computation of profit margin ratio

Computation of asset turnover ratio

Computation of return on investment

Computation of residual income

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Corporate Finance

Influences On Business

Introduction to Business

Organizational Behavior

Strategic Direction

Business Case Studies

Study anywhere. Anytime. Across all devices.

Padgett Company has compiled the following data:
Net sales revenue $1,000,000
Operating income 60,000
Average total assets 400,000
Management’s target rate of return 12%
Compute the following amounts for Padgett:
Profit margin ratio
Asset turnover ratio
Return on investment
Residual income