Question

Solomon Technologies, Inc. has three divisions. Solomon has a desired rate of return of 12.0 percent. The operating assets and income for each division are as follows:

     

Divisions	Operating Assets				Operating Income
Printer	$	680,000			$	109,480
Copier		950,000				100,700
Fax		500,000				67,500
Total	$	2,130,000			$	277,680

Solomon headquarters has $134,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:

	Expected ROIs for
Divisions	Additional Investments
Printer	13.5	%
Copier	12.5	%
Fax	11.5	%

Required

1. g.Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Answer 1

Residual Income (Loss) $22.080 1 At the corporate (headquarters) level Printer Copier Fax $27.880 ($13,300) $7,500 Printer Copier Fax $2.010 $670 (5670) Printer Copier $29.890 ($12,630) $6,830 14 Fax *Residual Incomec = Operating income - Operating assets * Minimum 16 required rate of return) Calculations are shown below: Α в Residual Income (Loss) =277680-2130000*12%) 2 1 At the corporate (headquarters) level 4 2 Printer Copier Fax =109480-(680000*12%) =100700-(950000*12%) =67500-(500000*12%) 83 Printer Copier Fax =(134000*13.5%)-(134000*12%) =(134000*12.5%)-(134000*12%) =(134000*11.5%)-(134000*129) 12 4 Printer Copier Fax =(109480+(134000*13.5%)-(680000+134000)*12%) =(100700+(134000*12.5%)-((134000+950000)*12%) =(67500+(134000*11.5%))-((134000+500000)*12%) 14 16 "Residual Incomec = Operating income - Operating assets * Minimum required rate of return)