East Division of Betty DeRose, Inc. reported the following information related t

Question

 East Division of Betty DeRose, Inc. reported the following information related to the single product it manufactures:  selling price per unit ...........................     $25 variable costs per unit ..........................     $18 units sold .......................................   60,000 turnover .........................................    1.60 residual income ..................................   $225,000 margin ...........................................     25%  Calculate what the East Division's residual income would have been if they had sold 77,000 units.  Do not use decimals in your answer. 

Explanation / Answer

First of all let us find out the net income :_

Margin = Profit / Net sales = 25% ( given )

Profit / ( 60000 * 25 ) = 25 %

Profit = $ 375000

Now, Turnover = Net sales / Assets = 1.60 ( given )

( 60000 * 25 ) / Assets = 1.60

Assets = $ 937500

Next , residual income = Net income - ( Assets * Minimum reqd. rate of return ) = $ 225000 ( given )

$ 375000 - (  $ 937500 * Minimum reqd. rate of return ) = $ 225000

$ 150000 = $ 937500 * Minimum reqd. rate of return

Minimum reqd. rate of return = 16 %

Net income = 77000 * 25 * 25 % = $ 481250

Residual Income = 481250 - ( 937500 * 16 % ) = $ 331250

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