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Horngren'S Financial And Managerial Accounting
Found in: Page 1346

Short Answer

Padgett Company has compiled the following data:

Net sales revenue $1,000,000

Operating income 60,000

Average total assets 400,000

Management’s target rate of return 12%

Compute the following amounts for Padgett:

  1. Profit margin ratio
  2. Asset turnover ratio
  3. Return on investment
  4. Residual income

The profit margin ratio of the company is 6%.

The asset turnover ratio is 2.5 times.

Return on investment is 15%.

Residual income of the company is $12,000.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Operating income

Operating income refers to the income generated by a business concern from its core operations. It is computed by taking the difference between sales revenue and associated costs such as variable and fixed.

Step 2: Computation of profit margin ratio

Step 3: Computation of asset turnover ratio

Step 4: Computation of return on investment

Step 5: Computation of residual income

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