Luke Company has three divisions: Peak, View, and Grand. The company has a hurdl
ID: 2583716 • Letter: L
Question
Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.26 percent. Selected operating data for the three divisions follow:
2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.)
Peak View Grand Sales revenue $ 330,000 $ 238,000 $ 309,000 Cost of goods sold 216,000 112,000 183,000 Miscellaneous operating expenses 37,000 35,000 36,000 Average invested assets 1,360,000 880,000 1,115,0002. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.)
Peak View Grand Residual Income (Loss)
Explanation / Answer
Company’s Required rate of Return = 6.26%
(In $)
Peak
View
Grand
Sales Revenue
330,000
238,000
309,00
Less: Cost of Goods Sold
216,000
112,000
183,000
Misc. Operating Expenses
37,000
35,000
36,000
Profit/Income
77,000
91,000
90,000
Average Invested Assets
1,360,000
880,000
1,115,000
Company’s Residual Income = Income – Company required rate
= Income – (Required Rate * Average Invested Assets)
Peak’s Residual Income = 77,000 – (6.26% * 1,360,000)
Peak’s Residual Income = ($8,136)
View’s Residual Income = 91,000 – (6.26% * 880,000)
View’s Residual Income = $35,912
Grand’s Residual Income = 90,000 – (6.26% * 1,115,000)
Grand’s Residual Income = $20,201
Peak
View
Grand
Sales Revenue
330,000
238,000
309,00
Less: Cost of Goods Sold
216,000
112,000
183,000
Misc. Operating Expenses
37,000
35,000
36,000
Profit/Income
77,000
91,000
90,000
Average Invested Assets
1,360,000
880,000
1,115,000
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