The following information is available for the South Division of XYZ Company and
ID: 2472448 • Letter: T
Question
The following information is available for the South Division of XYZ Company and the single product it manufactures: selling price per unit ........................... $20 variable costs per unit .......................... $14 units sold ....................................... 75,000 turnover ......................................... 1.20 residual income .................................. $150,000 margin ........................................... 20% Calculate what the South Division's residual income would have been if they had sold 91,000 units. Do not use decimals in your answer.
Explanation / Answer
Answer:
Las Year Contribution Margin = 75,000 ($20 – 14) = $450,000
Turnover Ratio = Sales / Total Assets = 1.20
Last Year Sales = $20 x 75,000 = $1,500,000
Total Asset = Sales / Turnover Ratio = $1,500,000 / 1.20 = $1,250,000
Residual Income of Last year = Contribution margin – (Cost of Capital x Invested Capital) = $150,000
$450,000 – (Cost of Capital x $1,250,000) = $150,000
Cost of Capital x $1,250,000 = $450,000 - $150,000 = $300,000
Cost of Capital = $300,000 / $1,250,000 = 0.24 or 24%
Calculation of Residual Income if South Division sold 91,000 Units
Residual Income = Contribution margin – (Cost of Capital x Invested Capital)
Contribution margin on sale of 91,000 Units = 91,000 ($20 - $14) = $546,000
Residual Income = $546,000 – (24% x $1,250,000) = $546,000 - $300,000 = $246,000
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