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Westerville Company reported the following results from last years operations:
| | |
| Sales | $ | 1,500,000 |
| Variable expenses | | 500,000 |
| Contribution margin | | 1,000,000 |
| Fixed expenses | | 700,000 |
| Net operating income | $ | 300,000 |
| Average operating assets | $ | 1,000,000 |
| |
At the beginning of this year, the company has a $200,000 investment opportunity with the following cost and revenue characteristics:
| | |
| Sales | $ | 300,000 | |
| Contribution margin ratio | | 60 | % of sales |
| Fixed expenses | $ | 132,000 | |
| |
The companys minimum required rate of return is 10%.
What is the residual income of this years investment opportunity?
If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
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