[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 $275,000 investment opportunity with the following cost and revenue characteristics:

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

1. What is last year’s residual income?

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

3. 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

Req 1: Residual income of last year Sales: 2,200,000 Less: variable expense 660,000 Contribution 1,540,000 Less: Fixed expense 1,100,000 Net operating income 440,000 Less: Required return on assets 206250 (1375,000 *15%) Residual income 233,750 Req 2: Residual Income of Investment Sales: 440,000 Less: variable expense@40% 176,000 Contribution 264,000 Less: Fixed expense 220,000 Net operating income 44,000 Less: Required return on assets 41250 (275,000 *15%) Residual income 2,750 Req 3: Residual income of the company as a whole next year Total Sales 2,640,000 Less: Total variable expense(660,000+176000) 836000 Contribution 1,804,000 Less: Total Fixed expense(1100,000+220,000) 1,320,000 Net Operating income 484,000 Less: Required return 247,500 (1375000+275000 @ 15%) Residual Income 236,500

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