Westerville Company reported the following results from last year’s operations:

Question

Westerville Company reported the following results from last year’s operations:

At the beginning of this year, the company has a $287,500 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 15%.

12a. What is the residual income of this year’s investment opportunity?

12b. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Sales $ 2,300,000 Variable expenses 670,000 Contribution margin 1,630,000 Fixed expenses 1,170,000 Net operating income $ 460,000 Average operating assets $ 1,437,500

Explanation / Answer

Answer 12a Calculation of residual income of investment opportunity Sales $460,000.00 Less : Variable cost 50% $230,000.00 Contribution Margin $230,000.00 Less : Fixed Expenses $161,000.00 Net Operating Income $69,000.00 Less : Minimum required return $43,125.00 Residual Income $25,875.00 Minimum required return out of investment = Cost of investment * company’s minimum required rate of return Minimum required return out of investment = $287500 * 15% = $43,125 Answer 12b Last year return on investment = Net Operating Income / Average operating assets = $460000 / $1437500 = 32% As the company performs the same as last year , this year return on investment be = 32% Residual Income = Net operating Income out of investment - Minimum required return out of investment Net operating Income out of investment = $287500 * 32% = $92,000 Residual Income = $92000 - $43125 = $48,875

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.