Thursday, 2 August 2012

Financial data for Bridger, Inc., for last year are as follows:

Problem 11-18 Return on Investment (ROI) and Residual Income [LO1, LO2]
Financial data for Bridger, Inc., for last year are as follows:

Bridger, Inc.
Balance Sheet
    Beginning
Balance
 Ending
Balance
Assets        
  Cash $ 125,000   $ 130,000  
  Accounts receivable   340,000     480,000  
  Inventory   570,000     490,000  
  Plant and equipment, net   845,000     820,000  
  Investment in Brier Company   400,000     430,000  
  Land (undeveloped)   250,000     250,000  
 



  Total assets $ 2,530,000   $ 2,600,000
 







Liabilities and Stockholders' Equity        
  Accounts payable $ 380,000   $ 340,000  
  Long-term debt   1,000,000     1,000,000  
  Stockholders' equity   1,150,000     1,260,000  
 



  Total liabilities and stockholders' equity $ 2,530,000   $ 2,600,000  
 









Bridger, Inc.
Income Statement
   Sales   $ 4,180,000  
   Operating expenses     3,553,000  
   

   Net operating income     627,000  
   Interest and taxes:      
        Interest expense $ 120,000    
        Tax expense 200,000   320,000  
 


   Net income   $ 307,000  
   





The company paid dividends of $197,000 last year. The “Investment in Brier Company” on the balance sheet represents an investment in the stock of another company.

Required:
1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round the "Turnover" to 2 decimal places. Omit the "%" sign in your response.)

   
  Margin %  
  Turnover      
  ROI %  


2. The board of directors of Bridger, Inc., has set a minimum required return of 20%. What was the company’s residual income last year? (Omit the "$" sign in your response.)

  Residual income $  



Explanation: 1.
Operating assets do not include investments in other companies or in undeveloped land.

    Ending
Balances
  Beginning
 Balances
  Cash $ 130,000   $ 125,000  
  Accounts receivable   480,000     340,000  
  Inventory   490,000     570,000  
  Plant and equipment (net)   820,000     845,000  
 



  Total operating assets $ 1,920,000   $ 1,880,000  
 









Average operating assets =
$1,880,000 + $1,920,000
= $1,900,000
2

Margin =
Net operating income
   
Sales

  =
$627,000
= 15%
$4,180,000

Turnover =
Sales
   
Average operating assets

  =
$4,180,000
= 2.20
$1,900,000

 ROI =
 Margin × Turnover

  =  15% × 2.2 = 33%

2.

     
  Net operating income $ 627,000  
  Minimum required return   (20% × $1,900,000)   380,000  
 

  Residual income $ 247,000