Jarriot, Inc. presented two years of data fro its Furniture Divicion and its Houseware Division: Furniture Division: Year 1 Year 2 Sales $35,500,000 $38,200,000 Operating Income 1,440,000 1,550,000 Average Operating Assets 2,390,000 2,390,000 Houseware Division: Year 1 Year 2 Sales $11,800,000 $12,500,000 Operating Income 650,000 520,000 Average Operating Assets 5,700,000 5,700,000 At the end of Year 2, the manager of the Houseware Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects, th Espresso-Pro and the Mini-Prep. Espresso-Pro Mini-Prep Operating Income $28,000 $15,300 Outlay 150,000 100,000 Jarriot's corporate headquarters has made available up to $500,000 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%. 1. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.) The Espresso-Pro is added The Mini-Prep is added Both investments are added Neither investment is made Which alternative do you think the divisional manager will choose? 2. Assuming that management acts as you recommend in question 1, compute the change in profit from the divisional manager's investment decision.
Jarriot, Inc. presented two years of data fro its Furniture Divicion and its Houseware Division: Furniture Division: Year 1 Year 2 Sales $35,500,000 $38,200,000 Operating Income 1,440,000 1,550,000 Average Operating Assets 2,390,000 2,390,000 Houseware Division: Year 1 Year 2 Sales $11,800,000 $12,500,000 Operating Income 650,000 520,000 Average Operating Assets 5,700,000 5,700,000 At the end of Year 2, the manager of the Houseware Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects, th Espresso-Pro and the Mini-Prep. Espresso-Pro Mini-Prep Operating Income $28,000 $15,300 Outlay 150,000 100,000 Jarriot's corporate headquarters has made available up to $500,000 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%. 1. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.) The Espresso-Pro is added The Mini-Prep is added Both investments are added Neither investment is made Which alternative do you think the divisional manager will choose? 2. Assuming that management acts as you recommend in question 1, compute the change in profit from the divisional manager's investment decision.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Jarriot, Inc. presented two years of data fro its Furniture Divicion and its Houseware Division:
Furniture Division:
| Year 1 | Year 2 | |
| Sales | $35,500,000 | $38,200,000 |
| Operating Income | 1,440,000 | 1,550,000 |
| Average Operating Assets | 2,390,000 | 2,390,000 |
Houseware Division:
| Year 1 | Year 2 | |
| Sales | $11,800,000 | $12,500,000 |
| Operating Income | 650,000 | 520,000 |
| Average Operating Assets | 5,700,000 | 5,700,000 |
At the end of Year 2, the manager of the Houseware Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects, th Espresso-Pro and the Mini-Prep.
| Espresso-Pro | Mini-Prep | |
| Operating Income | $28,000 | $15,300 |
| Outlay | 150,000 | 100,000 |
Jarriot's corporate headquarters has made available up to $500,000 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
1. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.)
- The Espresso-Pro is added
- The Mini-Prep is added
- Both investments are added
- Neither investment is made
Which alternative do you think the divisional manager will choose?
2. Assuming that management acts as you recommend in question 1, compute the change in profit from the divisional manager's investment decision.
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