The Pasta Division manager of Whole Grain Corporation is considering investing i

Question

The Pasta Division manager of Whole Grain Corporation is considering investing in a project that had sales of $5,500,000 and operating income of $500,000 last year. The total assets of the project were $2,750,000, while current liabilities were $280,000 Whole Grain Corporation's target rate of return is 15% Pasta Dvision's Rol before the investment is 20% What is the project's Residual Income (RI) and would the Pasta Division's manager accept or reject the project if the division manager is evaluated based on RI? O A. $87,500 and reject O B. $87,500 and accept OC. $129,500 and accept O D. $412,500 and accept

Explanation / Answer

Q1. Answer is C. $129,500 and accept Explanation: Sales: $ 5500,000 Operating income: $ 500,000 Net Assets employed: 2750,000 -280,000 = $ 2470,000 Actual income 500,000 Target income (2470000*15%) 370500 Residual icnome 129,500 Q2. Answer is D. $ 332.50 F Explanation: Std Admin cost for 4310 patients: 17000+0.75*4310 = 20232.50 Actual admin oh = $19900 Admin Oh flexible bduget variance= Std cost - Actual oh 20232.50 -19900 = $ 332.50 F Q3.. Answer is B. 100% and aceept Explanation: Operating income: $ 250,000 Net assets (1000,000-750,000): 250,000 Return on Investment = Operating iincome / Net assets = 250,000/250,000 =100% Q4. Answer is C. $ 565 Explanation: Variable cost incurred : (150+160+140): 450 Contribution lost (700-586) 114 Cost to selling division 564 Therefore, Mminimum selling price is $565

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