Answer:
Joel de Paris, Inc.
1a. Company's margin = Net operating income / Sales x 100 = $652,860 / $5,022,000 x 100 = 13% based on net operating income
Net Margin = net income / sales x 100 = $328,860 / $5,022,000 x 100 = 6.5%
1b. Turnover = $5,022,000
1c. Return on Investment (ROI) = Net Income / Average cost of investment (average assets) = $328,860/$2,511,000 x 100 = 13%
2. Residual income = Net Income minus Minimum Expected Returns
Minimum Expected Returns = 17% of Average Cost of Investment = 17% x $2,511,000 = $426,870.
$328,860 - $426,870 = ($98,010)
Explanation:
a) Margin: Margin is the profit or income made in a financial period. It is calculated by deducting costs from the sales revenue. There are two important levels for margin: the gross margin and the net margin. The gross margin represents the profit after deducting direct costs associated with revenue. The net margin is the profit after deducting all business running expenses. It is also called net income.
b) Turnover is the total sales in a financial period, otherwise called the 'gross revenue' or 'gross income.' It is different from profit or margin, and it measures the overall performance of a business.
c) Return on Investment is a financial ratio which measures the efficiency and performance of an investment. It is calculated as net income divided by the average cost of investment multiplied by 100.
d) Average Assets = ($2,474,000 + $2,548,000) / 2 = $2,511,000
e) The Residual Income is Economic Value Added. It is obtained by deducting the cost of capital from the net operating profit after taxes.
