Residual Income (Mas)

In: Business and Management

Submitted By tisayperez
Words 700
Pages 3
CONTROLLING THE RATE OF RETURN
Return on investment is normally used to judge the managerial performance in an investment center. Managers therefore try to control and improve the ROI of their investment center.
Rate-of-return regulation was used most regularly to determine reasonable prices for goods supplied by utility companies. This regulation is considered fair due to the fact that they give the company the opportunity to recover costs incurred by providing consumers with their goods or services while simultaneously protecting consumers from paying exorbitant prices that would provide these companies with monopolistic profits. Under this method of regulation, government regulators examine the firm's base rate, cost of capital, operating expenses, and overall depreciation in order to estimate the total revenue needed for the firm to fully cover its expenses.
The goal of rate-of-return regulation is for the regulator to evaluate the effects of different price levels on potential earnings for a firm in order for consumers to be protected while ensuring investors receive a "fair" rate of return on their investment. An investment center manager can improve ROI in basically three ways. To illustrate how an investment center manager can improve ROI by making the use of three methods mentioned above consider the following example:
Example:
The following data represents the results of an investment center of the operations of a company for the most recent month. Net operating income
Sales
Average operating assets | $10,000
100,000
50,000 |

The rate of return generated by the company for this investment center is as follows:
ROI = Margin × Turnover
(Net operating income / Sales) × (Sales / Average operating assets)
($10,000 / $100,000) × ($100,000 / $50,000)
10% × 2
= 20%
As we stated above that manager can increase…...

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