Question

Paula Boothe, president of the Indigo Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company. Given the company’s decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 13% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $234,000 in operating income.

Calculate the residual income for the proposed new line of energy drinks.

Answer 1

Answer:

$54,000

Explanation:

The computation of the residual income is shown below:

= Operating income - minimum return

where,  

operating income = $234,000

And, the minimum return equal to

= Invested asset amount × minimum rate of return

= $1,800,000 × 10%

= $180,000

Now put these values to the above formula  

So, the value would equal to  

= $234,000 - $180,000

= $54,000