[The following information applies to the questions displayed below.] Westervill

Question

[The following information applies to the questions displayed below.]

Westerville Company reported the following results from last year’s operations:

This year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 15%.

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

13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Westerville Company reported the following results from last year’s operations:

Explanation / Answer

12) Residual income for this year investment oppurtunity is : Average operating assets 350000 Net operating income Sales 560000 (-) Variable cost 168000 Contribution 392000 (-) Fixed cost 336000 Net operating income 56000 Minimum required return 52500 (350000*15%) Residual income = 56000-52500 3500 13) if the company pursues the investment oppurtunity and otherwise performs the same as last year, residual income will be : Average operating assets 1225000 (875000+350000) Net operating income 266000 (210000+56000) Minimum required return 183750 (1225000*15%) Residual income = 266000-183750 82250

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