Question

Exercise 10-15 (Part Level Submission) Blossom Decor sells home decor items through three distribution channels-retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows: Retail Stores Sales revenue $12,035,000 Variable expenses 4,819,000 Direct fixed expenses 6,730,000 Average assets 5,281,000 Required rate of return Internet $2,740,000 1,377,000 1,196,000 2,930,000 12% Catalog Sales $3,623,000 2,176,000 996,000 2,990,000 12% 12% v (a) x Your answer is incorrect. Try again. Calculate the current residual income for each distribution channel. (If the residual income is a loss then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125).) Residual Income Retail $: Online $: Catalog

Answer 1

Residual Income = Net Operating Income - ( Average Operating Assets * Minimum Required rate of return )

Now,

Calculation of Residual Income for each channel as follows:

For Retail Stores:

Here,

Net Operating Income = Sales Revenue - Variable expenses - Direct Fixed Expenses

= $12,035,000 - $4,819,000 - $6,730,000

= $486,000

Average Operating Assets = $5,281,000

Minimum Required Rate of Return = 12%

Residual Income for retail stores = $486,000 - ($5,281,000 * 12%)

= $486,000 - $633,720

= - $147,720

For Online Sales:

Net Operating Income = Sales Revenue - Variable expense - Direct Fixed Expenses

  = $2,740,000 - $1,377,000 - $1,196,000

= $167,000

Average Operating Assets = $2,930,000

Minimum Rate of Return = 12%

Residual Income for online sales = $367,000 - ($2,930,000 * 12%)

= $167,000 - $351,600

= - $184,600

For Catalog Sales:

Net Operating Income = Sales Revenue - Variable Expenses - Direct Fixed Expenses

= $3,623,000 - $2,176,000 - $996,000

= $451,000

Average Operating Assets = $2,990,000

Minimum Average Rate of Return = 12%

Residual Income for Catalog Sales = $451,000 - ($2,990,000 * 12%)

= $451,000 - $358,800

= $92,200