Question

The Foundational 15 [LO10-1, LO10-2] [The following information applies to the questions displayed below.]

Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000 At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics: Sales $ 200,000 Contribution margin ratio 60 % of sales Fixed expenses $ 90,000 The company’s minimum required rate of return is 15%.

Foundational 10-12 12. What is the residual income of this year’s investment opportunity?

Answer 1

Answer- The residual income of this year’s investment opportunity =$12000.

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

= $30000-($120000*15%)

= $30000-$18000

= $12000

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

=($200000*60%)-$90000

=$30000