Question

Dale 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 Internet Catalog Sales Sales revenue $10,000,000 $4,000,000 $3,200,000 Variable expenses 4,000,000 1,500,000 1,800,000 Direct fixed expenses 4,500,000 1,000,000 1,200,000 Average assets 8,000,000 4,000,000 2,000,000 Required rate of return 12% 12% 12% Collapse question part (a) 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

Calculate residual income

	Retail	Online	Catalog
Sales	10000000	4000000	3200000
Variable expense	4000000	1500000	1800000
Direct fixed expense	4500000	1000000	1200000
Operating income	1500000	1500000	200000
Average operating assets	8000000	4000000	2000000
Minimum return	960000	480000	240000
Residual income	1500000-960000 = 540000	1500000-480000 = 1020000	200000-240000 = -40000