2) Lassiter Inc. reported the following results from last year\'s operations: Sa

Question

2) Lassiter Inc. reported the following results from last year's operations: Sales $ 7,200,000 Variable expenses 5,400,000 Contribution margin 1,800,000 Fixed expenses 1,296,000 Net operating income $ 504,000 Average operating assets $ 4,000,000 At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics: Sales $ 2,480,000 Contribution margin ratio 40 % of sales Fixed expenses $ 868,000 The company's minimum required rate of return is 14%.

The residual income for this year's investment opportunity when considered alone is closest to:

A) $112,000

B) $12,000

C) $0

D) $108,800

Explanation / Answer

Residual Income = Net operating income - required return
= $124,000 - ($800,000 x 14%)
= $12,000

Option B) $12,000 is correct answer.

Sales 2,480,000 Variable costs ($2,480,000 x 60%) $1,488,000 Contribution margin (2,480,000 x 40%) $992,000 Fixed expenses $868,000 Net operating income $124,000

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