Required information The Foundational 15 [LO11-1, L011-2] The following informat

Question

Required information The Foundational 15 [LO11-1, L011-2] The following information applies to the questions displayed below. Westerville Company reported the following results from last year's operations Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 1,750,000 520,000 1,230,000 880,000 350,000 Average operating assets875,000 At the beginning of this year, the company has a $200,000 investment opportunity with the following cost and revenue characteristics Sales Contribution margin ratio Pixed expenses $ 320,000 60% of sales $128,000 The company's minimum required rate of return is 20%.

Explanation / Answer

We know that Residual Income = Operating Income - ( Average operating Assets * required rate of return)

This year Operating Income along with investment opportunity =

$350,000 + [( $320,000 * 60 %) - $128,000] = $414,000

This year average operating asset along with investment opportunity = $875,000 + $200,000 = $1,075,000

Residual income this year = $414,000  - ( $1,075,000 * 20 %) = $199,000

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