Residual Income and Investment Decisions Allard, Inc., presented two years of data for its Frozen Foods Division and its Canned Foods Division. Frozen Foods Division: Year 1 Year 2 Sales $35,200,000 $38,200,000 Operating income 1,410,000 1,530,000 Average operating assets 9,350,000 9,350,000 Canned Division: Year 1 Year 2 Sales $11,700,000 $12,500,000 Operating income 600,000 500,000 Average operating assets 5,900,000 5,900,000 At the end of Year 2, the manager of the Canned Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects. The first is juice boxes for elementary school children. The second is fruit and veggie pouches for kids on the go. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows: Juice Box Fruit Pouch Operating income $28,000 $15,000 Outlay 200,000 150,000 Allard's corporate headquarters has made available up to $590,000 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 percent. Required: 1. Compute the residual income for each of the opportunities. (Round to the nearest dollar.) Juice Box residual income $ fill in the blank 1 Fruit Pouch residual income $ fill in the blank 2 2. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.) a. The juice box is added. $ fill in the blank 3 b. The fruit pouch is added. $ fill in the blank 4 c. Both investments are added. $ fill in the blank 5 d. Neither investment is made; the status quo is maintained. $ fill in the blank 6 Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose? 3. Assuming that management acts as you recommend in requirement 2, compute the change in profit (loss) from the divisional manager's investment decision. $ fill in the blank 9 Was the correct decision made
Residual Income and Investment Decisions
Allard, Inc., presented two years of data for its Frozen Foods Division and its Canned Foods Division.
| Frozen Foods Division: | ||
| Year 1 | Year 2 | |
| Sales | $35,200,000 | $38,200,000 |
| Operating income | 1,410,000 | 1,530,000 |
| Average operating assets | 9,350,000 | 9,350,000 |
| Canned Division: | ||
| Year 1 | Year 2 | |
| Sales | $11,700,000 | $12,500,000 |
| Operating income | 600,000 | 500,000 |
| Average operating assets | 5,900,000 | 5,900,000 |
At the end of Year 2, the manager of the Canned Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects. The first is juice boxes for elementary school children. The second is fruit and veggie pouches for kids on the go. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows:
| Juice Box | Fruit Pouch | |
| Operating income | $28,000 | $15,000 |
| Outlay | 200,000 | 150,000 |
Allard's corporate headquarters has made available up to $590,000 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
Required:
1. Compute the residual income for each of the opportunities. (Round to the nearest dollar.)
| Juice Box residual income | $ fill in the blank 1 |
| Fruit Pouch residual income | $ fill in the blank 2 |
2. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.)
a. The juice box is added.
$ fill in the blank 3
b. The fruit pouch is added.
$ fill in the blank 4
c. Both investments are added.
$ fill in the blank 5
d. Neither investment is made; the status quo is maintained.
$ fill in the blank 6
Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?
3. Assuming that management acts as you recommend in requirement 2, compute the change in
$ fill in the blank 9
Was the correct decision made?
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