Question

Smith's Chocolates submitted the following results from last year’s operations:

Sales $ 11,400,000

Variable expenses 8,180,000

Contribution margin 3,220,000

Fixed expenses 2,422,000

Net operating income $ 798,000

Average operating assets $ 6,000,000

At the beginning of this year, the company has a $900,000 investment opportunity with the following characteristics:

Sales $ 2,880,000

Contribution margin ratio 30 % of sales

Fixed expenses $ 720,000

The company’s minimum required rate of return is 12%. If the company pursues the investment opportunity, this year's combined residual income for the entire company will be closest to:

Question 20 options:

$942,000

$24,300

$114,000

$828,000

Answer 1

Smith's Chocolates Contribution margin (30% × $2,880,000) Fixed expenses Net operating income 864000 720000 144000 Net operating income = $798,000 + $144,000 = $942,000 Average operating assets = $6,000,000 + $900,000 = $6,900,000 Average operating assets Net operating income Minimum required return ($6,900,000 x 12%) Residual income $6,900,000 $942,000 $828,000 $114,000