Colleen Barry is the general manager of Crane Industries’ Industrial Products di

Question

Colleen Barry is the general manager of Crane Industries’ Industrial Products division. The division is treated as an investment center, and Colleen’s performance is measured using residual income. In preparing the forecast for next year, Colleen assumes the division will generate $30,030,000 in revenue using average operating assets of $19,030,000 . The required minimum rate of return is 15%.

(a)

If Colleen wants the division to achieve $1,973,000 in residual income, what is the maximum amount of operating expenses the division can incur to achieve that target?

Explanation / Answer

(A) Minimum Return on Operating Assets required = 19,030,000*15% =2,854,500

(B) Residual Income required by Colleen = 1,973,000

(C) Revenue =30,030,000

(D) Maximum Operating Expenses that can be incurred = 30,030,000-2,854,500-1,973,000=25,202,500

Thanks

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