Vernon Home Maintenance Company earned operating income of $6,179,800 on operati

Question

Vernon Home Maintenance Company earned operating income of $6,179,800 on operating assets of $58,300,000 during 2018. The Tree Cutting Division earned $1,141,800 on operating assets of $6,920,000. Vernon has offered the Tree Cutting Division $2,150,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $414,950. Vernon has a desired return on investment (ROI) of 8.60 percent. Required Calculate the return on investment for Vernon, the Tree Cutting Division, and the additional investment opportunity. Calculate the residual income for Vernon, the Tree Cutting Division, and the additional investment opportunity.

Explanation / Answer

Vernon Tree Cutting Division Additional investment opportunity Operating assets 58300000 6920000 2150000 Desired return on investment 8.60% 8.60% 8.60% Return required 5013800 595120 184900 Operating income 6179800 1141800 414950 Residual income 1166000 546680 230050

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