Question

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 1

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