Exercise 12-21 Margin, Turnover, Return on Investment, Average Operating Assets

Elway Company provided the follworing income statement for the last year:
Sales $ 1,040,000,000
Less: Variable expenses $ 700,250,000
Contribution margin $ 339,750,000
Less: Fixed expenses $ 183,750,000
Operating income $ 156,000,000

At the bginning of last year, Elway had $28.300.000 in operating assets. At the end of the year
Elway had $23.700.000 in operating assets.

1. Average Operating Assets = ($28.000.000 + 23.700.000) / 2

$ 26,000,000

2. Compute the margin and turnover ratio for last year. (Note: Roind the answer for
margin ration to two decimal places)

Margin = 156.000.000/1.040.000.000
0.15 15%

Turnover = 1.040.000.000 / 26.000.000

40

3. Compute ROI (Note: Round answer to two decimal places)

ROI = 156.000.000/26.000.000
6

4. CONCEPTUAL CONNECTION Briefly explain the meaning of ROI.

ROI adalah Return on Investment. ROI merupakan pendekatan yang mengevaluasi konsekuensi
keuangan dari suatu keputusan dan tindakan investasi bisnis. ROI adalah rasio profibalitas yang mengukur
efisiensi investasi dengan melihat perbandingan antara laba bersih dengan total biaya atau modal
yang diinvestasikan. ROI juga mengukur keuntungan atau kerugian yang muncul dari investasi terhadap
jumlah uang yang diinvestasikan.

5. CONCEPTUAL CONNECTION Comment on why the ROI for Elway Company is relatively
high (as compared to the lower ROI of a typical manufacturing company)

Menurut saya kenapa ROI Elways Company itu relatif tinggi, karena operating income yang dimiliki pihak
Elway Company cukup tinggi sebesar 156.000.000 dapat diartikan bahwa semua kegiatan yang dilakukan
pihak Elway company berjalan dengan baik. Turnover dan juga margin menunjukan nilai yang positif, dimana
Turnover sebesar 40 dan Margin 15%.

E12-25 Economic Value Added

Washington Company has two divisions; the Adams Division and the Jefferson Division, the following
informantion pertaints to last year's results:
Adams Division Jefferson Division
Net (after-tax) income $ 605,000 $ 315,000
Total capital employed 4000000 3250000

Washington's actual cost of capital was 12%

1. EVA for Adams Division

EVA =After tax Operating Income - (Actual Percentage Cost of Capital x Total Capital Employed)
= $ 605.000 - (12% x 4.000.000)
EVA = $ 125,000

2. EVA for Jefferson Division

EVA =After tax Operating Income - (Actual Percentage Cost of Capital x Total Capital Employed)
= $ 315.000 - (12% x 3.250.000)
EVA = $ (75,000)

3. Conceptual Connection is each division creating or destroying wealth?

Adams Division Jefferson Division

EVA $ 125,000 $ (75,000)

Kalo dilihat dari tabel diatas, untuk pihak Adam Division bisa dikatakan creating wealth ini juga karena
biarpun total employednya sebesara 4.000.000 tapi Net income yang dimiliki pihak Adams Division
relatif tinggi. Sedangkan untuk pihak Jefferson Division destroying wealth karena EVA yang muncul
negatif yaitu sebesar $ -75.000 dikarenakan juga net incomenya yang cukup rendah.

4. Conceptual Connection Describe generally the types of actions that Washington's management
team could take to increase Jefferson Division's EVA?
Menurut saya, agar EVA pada Jefferson Divison meningkat, pihak Washington harus meningkat Net Income
pihak Jefferson Divison agar bisa naik. Mungkin menaikkan Net Incomenya sebesar $400.000 sehingga
EVA Jeffereson Division bisa sebesar 10.000

E12-26 Residual Income

1. Calculate the residual income for the Adams Division

Residual Income for Adams Division = $605.000 - (8% x 4.000.000)
$ 285,000
2. Calculate the residual income for the Jefferson Division
Residual Income for Adams Division = $315.000 - (8% x 3.250.000)
$ 55,000