Altoona Technologies, Inc. has
Altoona Technologies, Inc. has three divisions. Altoona has adesired rate of return of 11.0 percent. The operating assets andincome for each division are as follows:
| Divisions | Operating Assets | Operating Income | |||||
| Printer | $ | 740,000 | $ | 115,440 | |||
| Copier | 1,010,000 | 101,000 | |||||
| Fax | 560,000 | 72,800 | |||||
| Total | $ | 2,310,000 | $ | 289,240 | |||
Altoona headquarters has $140,000 of additional cash to investin one of its divisions. The division managers have identifiedinvestment opportunities that are expected to yield the followingROIs:
| Expected ROIs for | ||
| Divisions | Additional Investments | |
| Printer | 12.5 | % |
| Copier | 11.5 | % |
| Fax | 10.5 | % |
Required
-
g. Calculate the residual income:
-
(1) At the corporate (headquarters) level before the additionalinvestment.
-
(2) At the division level before the additional investment.
-
(3) At the investment level.
-
(4) At the division level after the additional investment.
Answer:
Solution
1) Residual income at corporate level beforeInvestment
Given
Total Operating Assets = $2,310,000
Total Operating Income = $ 289,240
Rate of Return = 11%
Residual income at corporate level before Investment = Totaloperating Income – Total operating assets * rate of return
= 289240 – 2310000*11/100
= $35,140
2) Residual income At the division level before theadditional investment:
| Divisions | Operating Assets($) | Operating Income($) | Calculation | ResidualIncome($) |
| Printer | 740,000 | 115,440 | =115440-740000*11% | 34,040 |
| Copier | 1,010,000 | 101,000 | =101000-1010000*11% | -10,100 |
| Fax | 560,000 | 72,800 | =72800-560000*11% | 11,200 |
3) Residual income At the investment level:
| Divisions | Calculation | Residualincome($) |
| Printer | =(12.5%-11%)*140000 | 2,100 |
| Copier | =(11.5%-11%)*140000 | 700 |
| Fax | =(10.5%-11%)*140000 | -700 |
4) Residual income At the division level after theadditional investment:
Residual income At the division level after the additionalinvestment = Residual income At the division levelbefore the additional investment + Residual incomeAt the investment level
| Divisions | Calculation | Residual income($) |
| Printer | =34040+2100 | 36,140 |
| Copier | =-10100+700 | -9,400 |
| Fax | =11200-700 | 10,500 |
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
