Question

Exercise 10-16

Colleen Barry is the general manager of Cullumber Industries’ Industrial Products division. The division is treated as an investment center, and Colleen’s performance is measured using residual income. In preparing the forecast for next year, Colleen assumes the division will generate $30,110,000 in revenue using average operating assets of $19,020,000 . The required minimum rate of return is 16%.

(a)

If Colleen wants the division to achieve $1,959,000 in residual income, what is the maximum amount of operating expenses the division can incur to achieve that target?

Operating expenses

$

Answer 1

Answer- a)- If Colleen wants the division to achieve $1959000 in residual income, the maximum amount of operating expenses the division can incur to achieve that target is = $27846680.

Explanation-Residual income =Operating income –(Average operating assets*Required rate of return)

$1959000 = Operating income - ($19020000*16%)

$1959000 = Operating income - $304320

Operating income = $1959000+$304320

= $2263320

Maximum amount of operating expenses the division can incur to achieve that target residual income = Sales revenue – Operating income

= $30110000-$2263320

= $27846680