Candy\'s Chocolate Company\'s financial management is compiling data in order to
ID: 2598107 • Letter: C
Question
Candy's Chocolate Company's financial management is compiling data in order to assess the favorability of the company's investments. The Boise division of the company calculates a total investment of $2,000,000 and the operating income is computed to be $380,000 while the required rate of return is 15%. The Butte division of the company has tallied a total investment of $1,500,000 and an operating income of $230,000 while the Butte division also has a 15% required rate of return.
Required
Compute the residual income at the Boise division and the cost of capital for the Butte division.
A.
$300,000 and $225,000
B.
$80,000 and $225,000
C.
$80,000 and $5,000
D.
$225,000 and $5,000
E.
$120,000 and $23
Explanation / Answer
SOLUTION
Correct option is $80,000 and $225,000
Residual income at the Boise division-
Residual income = Operating income - (Minimum rate of return * average operating assets)
= $380,000 - ($2,000,000 *15%)
=$380,000 - $300,000
= $80,000
Cost of capital for the Butte division-
= $1,500,000 * 15% = $225,000
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