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Lecture 16

MGAB03H3 Lecture Notes - Lecture 16: Icq, Earnings Before Interest And Taxes, Weighted Arithmetic Mean


Department
Financial Accounting
Course Code
MGAB03H3
Professor
G.Quan Fun
Lecture
16

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MANAGEMENT
ACCOUNTING
Chapter 16
IN-CLASS
QUESTIONS (ICQs)
SOLUTION

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ICQ #1
16.21 RI, ROI and EVA - Brannard Company
A. Residual income
= operating income – (rate of return x average assets)
= ($2,000,000 - $1,200,000 - $200,000) – (15% x $3,000,000)
= $600,000 - $450,000
= $150,000
B. ROI
= operating income / average investment
= $600,000/$3,000,000
= 20%
C. EVA
= adjusted after-tax income – [weighted average cost of capital x (adjusted total
assets – current liabilities)]
= [$600,000 x (1-0.36)] – [12% x ($3,000,000 - $200,000)]
= $384,000 - $336,000
= $48,000

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ICQ #2
16.23 ROI, RI, Breakeven Point, Contribution Margin - Oslo Company
[Note: Part C of this problem requires knowledge of breakeven analysis from Chapter 3.]
A. Before calculating ROI, it is first necessary to calculate income:
Sales (300,000 * $2) $600,000
Variable costs (450,000)
Fixed costs (90,000)
Income $ 60,000
ROI = $60,000/[($500,000 + $700,000)/2] = 10%
B. Residual income:
Income $ 60,000
Minimum return [($500,000 + $700,000)/2 x 0.15] (90,000)
Residual income $(30,000)
C. Variable cost per unit: $450,000/300,000 = $1.50
Breakeven number of units:
Breakeven units = Fixed costs/ CM per unit
CM per unit = $2.00 - $1.50 = $0.50
BE units = $90,000 / $.50
BE units = 180,000 units
D. Sales $600,000
Variable costs 450,000
Contribution margin $150,000
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