Question

Plum Partners are considering the purchase of a small bakery that appears to be performing well and would complement Plum Partners current operations. Information for the bakery follows:

Sales	$101,250
Contribution Margin	$36,500
Total Fixed Costs	$15,200
Beginning Operating Assets	$42,500
Ending Operating Assets	$51,500
Required Rate of Return	18.00%

What is the residual income of the bakery?

Multiple Choice

• $12,840

• ($25,700)

• $41,090

• $12,030

Answer 1

	ANSWER TO THE QUESTION
	RESIDUAL INCOME OF THE BAKERY	$                           12,840.00
	RESIDUAL INCOME = NET INCOME - PAID FOR COST OF CAPITAL IE, (AVERAGE OPERATING ASSET * REQUIRED RATE OF RETURN)
	PLUM PARTNERS
	COMPUTATION OF RESIDUAL INCOME
	PARTICULARS	COMPUTATION	AMOUNT
	SALES		$                101,250.00
	LESS:
	VARIABLE COST		$                  64,750.00
	CONTRIBUTION		$                  36,500.00
	LESS:
	FIXED COST		$                  15,200.00
	NET INCOME		$                  21,300.00
	LESS:
	REQUIRED RATE OF RETURN
	(AVARAGE OPERATING ASSET X REQUIRED RATE OF RETURN (%)	((42500+51500)/2)*18%	$                    8,460.00
		$47000*18%
	RESIDUAL INCOME		$                  12,840.00