Question

SuperPower PC Company makes computers and has two products, the Desktop, and the Laptop. To produce the Desktop, SuperPower PC employed assets of $7,250,000 at the beginning of 2017 and $9,450,000 of assets at the end of 2017. Other costs to manufacture the Desktop include the following:

Direct materials	$240 per unit
Setup	$790 per setup-hour
Production	$150 per machine-hour

General administration and selling costs for the Desktop total $1,540,000 in 2017. During the year, SuperPower PC produced 22,000 Desktops using 7,500 setup-hours and 52,500 machine-hours. It sold these computers for $1,100 each.

      Assuming that SuperPower PC defines investment as average assets during the period

Calculate the residual income for Desktop if SuperPower PC has a required rate of return of 24% on investments

$2004000

$1576000

$859000

$5584000

Answer 1

Answer : B = $ 1,576,000.

>> Sales = 22,000 * $ 1100

>> Sales = $ 24,200,000.

>> Total Cost = ( 22,000 * $ 240 ) + ( 7500 * $ 790 ) + ( 52,500 * $ 150 ) + $ 1,540,000

>> Total Cost = $ 20,620,000.

>> Net Operating Income = $ 24,200,000 - $ 20,620,000

>> Net Operating Income = $ 3,580,000.

>> Average Operating Asset = ( $ 7,250,000 + $ 9,450,000 ) / 2

>> Average Operating Asset = $ 8,350,000

>> Residual Income = Operating income - ( Average Operating Asset * Required rate )

>> Residual Income = $ 3,580,000 - ( $ 8,350,000 * 24 % )

>> Residual Income = $ 1,576,000