The following information provided by Dark Shadows Inc on Dec.31 2014.

Sales 2,640,000
Operating expenses 1,960,000
Average Operating assets 4,000,000
Required Rate of Return 20%
Instructions:

1. Calculate Margin, Turnover and Return on Investment.

2. Calculate Residual Income.
3. Dark Shadows Inc. planning to increase Average Operating Assets $600,000 during
2015. The estimations of managerial accountant that this investment will increase Net
Sales by 15% and Operating Expenses 20%. Do you recommend this investment? Show
your calculations.

1. Margin = net operating income/sales

= (2,640,000 – 1,960,000)/2,640,000 = 25.76% rounded
Turnover= Sales/average operating assets
= 2,640,000/4,000,000 = 66%

ROI = Margin x turnover = 0.2576 x 0.66 = 17.0016%

Or
680,000/4,000,000 = 17%

2. Residual income = net operating income – (A.O.A x R.R.R)

)x 0.20 4,000,000( – 680,000 =

( = 800,000 – 680,000 =
)120,000

3. New figures
New A.O.A = 4,000,000 + 600,000 = 4,600,000
New sales = (2,640,000 x 15%) + 2,640,000 = 3,036,000
New operating expenses = (1,960,000 x 20%) + 1,960,000 = 2,352,000
New operating income = 3,036,000 – 2,352,000 = 684,000

ROI = 684,000/ 4,600,000 = 14.86% we should reject the new investment