Westerville Company reported the following results from last
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)
Where- Operating income = (Sales*Contribution margin ratio)-Fixed expenses
Total operating income = $375000+$42000
Total average operating assets = $1250000+$350000
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