3) Lassiter Inc. reported the following results from last year\'s operations: Sa

Question

3) Lassiter Inc. reported the following results from last year's operations: Sales $ 7,200,000 Variable expenses 5,400,000 Contribution margin 1,800,000 Fixed expenses 1,296,000 Net operating income $ 504,000 Average operating assets $ 4,000,000 At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics: Sales $ 2,480,000 Contribution margin ratio 40 % of sales Fixed expenses $ 868,000 The company's minimum required rate of return is 14%.

If the company pursues the investment opportunity, this year's combined residual income for the entire company will be closest to:

A) $23,200

B) ($44,000)

C) $628,000

D) $672,000

Explanation / Answer

Residual Income = Actual income earned - Minimum required return.

= 628000 - 4800,000 * 14% = - 44,000

B) ($44,000) ............ Final answer

Old project continues to earn = 504000 ( already given in question)

New project wil earn = Sales * contribution margin - Fixed cost = 2480,000 * 0.40 - 868,000 = 124000

Total actual earning = 504000 + 124000 = 628000

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