Residual Income and Investment Decisions Allard, Inc., presented two years of data for its Frozen Foods Division and its
Posted: Wed Apr 27, 2022 11:09 am
Residual Income and Investment Decisions Allard, Inc., presented
two years of data for its Frozen Foods Division and its Canned
Foods Division. Frozen Foods Division: Year 1 Year 2 Sales
$35,700,000 $38,300,000 Operating income 1,420,000 1,550,000
Average operating assets 4,270,000 4,270,000 Canned Division: Year
1 Year 2 Sales $11,800,000 $12,800,000 Operating income 630,000
580,000 Average operating assets 5,500,000 5,500,000 At the end of
Year 2, the manager of the Canned Division is concerned about the
division's performance. As a result, he is considering the
opportunity to invest in two independent projects. The first is
juice boxes for elementary school children. The second is fruit and
veggie pouches for kids on the go. Without the investments, the
division expects that Year 2 data will remain unchanged. The
expected operating incomes and the outlay required for each
investment are as follows: Juice Box Fruit Pouch Operating income
$28,000 $15,400 Outlay 190,000 140,000 Allard's corporate
headquarters has made available up to $520,000 of capital for this
division. Any funds not invested by the division will be retained
by headquarters and invested to earn the company's minimum required
rate of return, 7 percent. Required: 1. Compute the residual income
for each of the opportunities. (Round to the nearest dollar.) Juice
Box residual income $ fill in the blank 1 Fruit Pouch residual
income $ fill in the blank 2 2. Compute the divisional residual
income for each of the following four alternatives: (Round to the
nearest dollar.) a. The juice box is added. $ fill in the blank 3
b. The fruit pouch is added. $ fill in the blank 4 c. Both
investments are added. $ fill in the blank 5 d. Neither investment
is made; the status quo is maintained. $ fill in the blank 6
Assuming that divisional managers are evaluated and rewarded on the
basis of residual income, which alternative do you think the
divisional manager will choose? 3. Assuming that management acts as
you recommend in requirement 2, compute the change in profit (loss)
from the divisional manager's investment decision. $ fill in the
blank 9 Was the correct decision made?
two years of data for its Frozen Foods Division and its Canned
Foods Division. Frozen Foods Division: Year 1 Year 2 Sales
$35,700,000 $38,300,000 Operating income 1,420,000 1,550,000
Average operating assets 4,270,000 4,270,000 Canned Division: Year
1 Year 2 Sales $11,800,000 $12,800,000 Operating income 630,000
580,000 Average operating assets 5,500,000 5,500,000 At the end of
Year 2, the manager of the Canned Division is concerned about the
division's performance. As a result, he is considering the
opportunity to invest in two independent projects. The first is
juice boxes for elementary school children. The second is fruit and
veggie pouches for kids on the go. Without the investments, the
division expects that Year 2 data will remain unchanged. The
expected operating incomes and the outlay required for each
investment are as follows: Juice Box Fruit Pouch Operating income
$28,000 $15,400 Outlay 190,000 140,000 Allard's corporate
headquarters has made available up to $520,000 of capital for this
division. Any funds not invested by the division will be retained
by headquarters and invested to earn the company's minimum required
rate of return, 7 percent. Required: 1. Compute the residual income
for each of the opportunities. (Round to the nearest dollar.) Juice
Box residual income $ fill in the blank 1 Fruit Pouch residual
income $ fill in the blank 2 2. Compute the divisional residual
income for each of the following four alternatives: (Round to the
nearest dollar.) a. The juice box is added. $ fill in the blank 3
b. The fruit pouch is added. $ fill in the blank 4 c. Both
investments are added. $ fill in the blank 5 d. Neither investment
is made; the status quo is maintained. $ fill in the blank 6
Assuming that divisional managers are evaluated and rewarded on the
basis of residual income, which alternative do you think the
divisional manager will choose? 3. Assuming that management acts as
you recommend in requirement 2, compute the change in profit (loss)
from the divisional manager's investment decision. $ fill in the
blank 9 Was the correct decision made?