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

Question

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

At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:

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

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

Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000

Explanation / Answer

Solution :- Calculation of residual income of the current year investment opportunity :-

Residual income = Net operating income - Minimum required return.

Net operating income = Contribution margin - Fixed expenses.

= (200000 * 60 %) - 90000

= 120000 - 90000

= $ 30,000.

Minimum required return = 120000 * 15 %

= $ 18000.

Accordingly, Residual income = 30000 - 18000

= $ 12,000.

Conclusion :- Residual income of the current year investment opportunity = $ 12,000.

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