Please help thank you! Crane Decor sells home decor items through three distribu
ID: 2595195 • Letter: P
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Please help thank you!
Crane Decor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows: Retail Stores Catalog Sales 3,632,000 2,161,000 993,000 2,910,000 10% Internet $12,012,000 Sales revenue Variable expenses Direct fixed expenses Average assets Required rate of $2,710,000 4,816,000 1,382,000 1,191,000 5,628,000 2,140,000 10% 6,737,000 10% return Calculate the current residual income for each distribution channel. (If the residual income is a loss then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125).) Residual Income Retai Online $ Catalog $ LINK TO TEXT LINK TO VIDEO The corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $520,000 and is expected to generate $61,100 in additional annual segment margin. Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system. (If the residual income is a loss then enter with a negative sign preceding the number, e.g.-5,125 or parenthesis, e.g. (5,125).) Residual Income Retail Online CatalogExplanation / Answer
DESCRIPTION RETAIL STORES INTERNET CATALOG SALES Basis Average Assets employed 5,628,000 2,140,000 2,910,000 Expected rate of return 10% 10% 10% So Return expected is 562,800 214,000 291,000 Multiply asset value and expected rate of return OPERATING INCOME Sales revenue 12,012,000 2,710,000 3,632,000 Variable expenses 4,816,000 1,382,000 2,161,000 Direct Fixed Expenses 6,737,000 1,191,000 993,000 Net Operating Income 459,000 137,000 478,000 Sales revenue minus variable and direct fixed expnses RESIDUAL INCOME (103,800) (77,000) 187,000 Operating income reduced by expected return In ase of new system is put in place with cost of $ 20000 and additional revenue of $ 61100 is generated then the residual income will be as under Increase in revenue 61100 61100 61100 Increase in revenue Cost involved 20000 20000 20000 Cost of system Incremental Operating Income 41100 41100 41100 Increase in operating income REVISED RESIDUAL INCOME (62,700) (35,900) 228,100 The residual income calculated earlier will be increased by the amount calculated as above
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