The Walnut Division of Benton Corp. has average invested assets of $22,500,000. Sales revenue of $27,000,000 results in an operating income of $2,379,500. The hurdle rate is 8%. a. Calculate the return on investment. b. Calculate the profit margin. c. Calculate the investment turnover. d. Calculate the residual income.
What will be an ideal response?
a. 10.58% = $2,379,500/$22,500,000
b. 8.81% = $2,379,500/$27,000,000
c. 1.2 = $27,000,000/$22,500,000
d. $579,500 = $2,379,500 - (8% × $22,500,000)
ROI = Operating income/Average invested assets. Profit margin = Operating income/Sales revenue. Investment turnover = Sales revenue/Average invested assets. Residual income = Operating income - Hurdle rate × Average invested assets.
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