[The following information applies to the questions displayed below.] Westervill

Question

[The following information applies to the questions displayed below.] Westerville Company reported the following results from last year's operations Sales Variable expenses Contribution margin Fixed expenses Net operating income $2,200,000 660,000 1,540,000 1,100,000 $440,000 Average operating assets $1,375,000 This year, the company has a $275,000 investment opportunity with the following cost and revenue characteristics $440,000 Sales Contribution margin ratio Fixed expenses 60% of sales $220,000 The company's minimum required rate of return is 15%. 8 Required information 12. What is the residual income of this year's investment opportunity? Residual income

Explanation / Answer

Solution: Residual income means excess of net income over the minimum required return.

In other words,

Residual income= net income - required return

= $44,000- $41,250

= $2,750

Working:

Net income = contribution margin - fixed expense

= 60% x 440,000 - 220,000

= $44,000

Required return = 15% x 275,000

= $41,250

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