1. (TCO D) Financial data for Beaker Company for last year appear below.

Beaker Company
Statement of Financial Position
Beginning
Balance

Ending
Balance

Assets
Cash
Accounts receivable
Inventory
Plant and Equipment (net)
Investment in Cedar Company
Land (undeveloped)
Total Assets

$50,000
20,000
30,000
120,000
80,000
170,000
$470,000

$70,000
25,000
35,000
110,000
100,000
170,000
510,000

Liabilities and Owners' Equity

Accounts payable
Long-term debt
Owner's equity
Total liabilities and owner's equity

$70,000
250,000
150,000
$470,000

$90,000
250,000
170,000
$510,000

Beaker Company
Income Statement
Sales
$414,000
Less Operating Expenses
351,900
Net Operating Income
62,100
Less Interest and Taxes
Interest Expense
$30,000
Tax Expense
10,000
40,000
Net Income
$22,000
The company paid dividends of $2,100 last year. The "Investment in Cedar Company" on the
statement of financial position represents an investment in the stock of another company.
Required:
i. Compute the company's margin, turnover, and return on investment for last year.
ii. The board of directors of Beaker Company has set a minimum required return of 20%. What
was the company's residual income last year?

1. Operating assets do not include investments in other companies

or in undeveloped land.

BEGINNING
BALANCE
CASH
$50,000
A.R.
20,000
INVENTORY
30,000
P & EQ. (NET)
120,000
TOTAL OP. ASSESTS
$220,000

ENDING
BALANCE
$70,000
25,000
35,000
110,000
$240,00

AVE. OP ASSETS= ($220,000+$240,000) / 2= $230,000

MARGIN = NET OP INCOME / SALES = $62,100 / $414,000 = 15%
TURNOVER = SALES / AVE. OP ASSETS= $414,000 / $230,000 = 1.8
ROI = MARGIN * TURNOVER = 15% * 1.8 = 27%
NET OP INCOME --------------$62,100
MIN. REQUIRED RETURN (20% * $230,000)-$46,000
RESIDUAL INCOME--------------------------------$16,000

--------------------------------------------------------------------------------------------------. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . Make. . . . . . . . Buy

Direct materials . . . . . . . . . . . . . . . . . . . . . .49,000. . . . . . . . . .0
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . .42,000 . . . . . . . . . 0
Variable overhead . . . . . . . . . . . . . . . . . . . . 39,200 . . . . . . . . . 0
Supervisor's salary . . . . . . . . . . . . . . . . . . . .32,900. . . . . . . . . 0
Depreciation of special equipment (Not relevant. Will be the same
either way)
Allocated general overhead . . . . . . . . . . . . . .37,800 . . . . . 28,800
Cost to purchase the part . . . . . . . . .. . . . . . . . . . . . . . . .198,100
Total Costs . . . . . . . . . . . . . . . . . . . . . . . . 200,900. . . . .227,600
What is the effect on the company's total net operating income of
buying part F77 from the supplier rather than continuing to make it
inside the company?
Operating income would decrease by $26,700 if they decided to
purchase the part.
Which alternative should the company choose?
Make, not buy.
Direct materials.................................................................................
Direct labor.......................................................................................

$969,000
270,750

Total..................................................................................................
Current monthly production..............................................................
Average direct materials and direct labor cost per unit....................

$1,239,75
0
14,250
$87

Since price on the special order is $102 per medal and the
relevant cost is only $87, the company would earn a profit of $15
per medal. Therefore, the special order should be accepted.