Sales $ 1,400,000 Variable expenses 720,000 Contribution margin 680,000 Fixed ex
ID: 2451760 • Letter: S
Question
Sales $ 1,400,000 Variable expenses 720,000 Contribution margin 680,000 Fixed expenses 470,000 Net operating income $ 210,000 Average operating assets $ 875,000 This year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics: Sales $ 560,000 Contribution margin ratio 70 % of sales Fixed expenses $ 336,000 The company’s minimum required rate of return is 15%. 12. What is the residual income of this year’s investment opportunity? 13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
Explanation / Answer
Residual income = Net operaitng income- ( average operating assets*minimum rate of return)
= $56,000- (350,000 *15%)
= $3,500
13) Average operating assets = $875,000 + $350,000 = $1,225,000
Net operating income = $210,000 +$56,000 = $266,000
Residual income = $266,000- (1,225,000*15%)
= $82,250
Contribution 560,000@70% $560,000 Less: Fixed expense $336,000 Net operating income $56,000Related Questions
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