Question

Altoona Technologies, Inc. has three divisions. Altoona has a desired rate of return of 11.0 percent. The operating assets and income 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 invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:

	Expected ROIs for
Divisions	Additional Investments
Printer	12.5	%
Copier	11.5	%
Fax	10.5	%

Required

1. g. Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Answer 1

Solution

1) Residual income at corporate level before Investment

Given

Total Operating Assets = $2,310,000

Total Operating Income = $ 289,240

Rate of Return = 11%

Residual income at corporate level before Investment = Total operating Income - Total operating assets * rate of return

= 289240 - 2310000*11/100

= $35,140

2) Residual income At the division level before the additional investment:

Divisions	Operating Assets ($)	Operating Income ($)	Calculation	Residual Income($)
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	Residual income($)
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 the additional investment:

Residual income At the division level after the additional investment = Residual income At the division level before the additional investment + Residual income At the investment level

Divisions	Calculation	Residual income ($)
Printer	=34040+2100	36,140
Copier	=-10100+700	-9,400
Fax	=11200-700	10,500