I need help with the following managerial accounting question involning residual
ID: 2582601 • Letter: I
Question
I need help with the following managerial accounting question involning residual income.
Problem 12-17 (Part Level Submission) Sarah Jones, the manager of the Teen division of the Benton Clothing Company, was evaluating the acquisition of a new embroidery machine. The budgeted operating income of the Teen division was $4,937,600 with total assets of $32,765,000 and noninterest-bearing current liabilities of $1,553,700. The proposed investment would add $1,044,100 to operating income and would require an additional investment of $5,280,700. The targeted rate of return for the Teen division is 14 percent. (Ignore taxes in this problem.)Explanation / Answer
Total Assets 32765000 Less: Non Interest Bearing Current Liabilities 1553700 Invested Assets 31211300 Opearating Income 4937600 Cost of capital @14% of Invested assets 4369582 Residual income (Operating Income-Cost of Capital) 568018 ROI (Operating Income/Invested assets) 16%