Question

# Westerville Company reported the following results from last year’s operations:        Sales   \$   1,500,000 Variable...

Westerville Company reported the following results from last year’s operations:

Sales   \$   1,500,000
Variable expenses      690,000
Contribution margin      810,000
Fixed expenses      435,000
Net operating income   \$   375,000
Average operating assets   \$   1,250,000

At the beginning of this year, the company has a \$350,000 investment opportunity with the following cost and revenue characteristics:

Sales   \$   420,000
Contribution margin ratio      70   % of sales
Fixed expenses   \$   252,000

The company’s minimum required rate of return is 10%.
13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Answer- 13)- If the company pursues the investment opportunity and otherwise performs the same as last year, residual income will it earn this year = \$257000.

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

= \$417000-(\$1600000*10%)

= \$417000-\$160000

= \$257000

Where- Operating income = (Sales*Contribution margin ratio)-Fixed expenses

= (\$420000*70%)-\$252000

= \$294000-\$252000

= \$42000

Total operating income = \$375000+\$42000

= \$417000

Total average operating assets = \$1250000+\$350000

= \$1600000

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