Exercise D10-14 Paula Boothe, president of the Armange Corporation, has mandate

Question

Exercise D10-14 Paula Boothe, president of the Armange Corporation, has mandate a minimum 10% return on investment for any pro ec undertaken b. the company. Given the company's decentralization, Paula leaves al investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 14% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $216,000 in operating income. Calculate the residual income for the proposed new line of energy drinks Residual income s If Martin Koch is evaluated based on residual income, will he choose to invest in the new line of energy drinks? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Residual income = Actual net income -minimum operating income

= 216000-(1800000*10%)

Residual income = 36000

Yes, he will choose to invest in the new line of energy drinks

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