The following information is available about the status and operations for Division B of Tallon Company, which has a minimum required ROI of 20%. Answer each item independently of the others. Division BDivisional investment$1,500,000 Divisional profit$550,000 Divisional sales$3,600,000 Required:a. Compute the residual income for Division B.b. Division B could increase its profit by $25,000 by increasing its investment by $100,000. Compute its new residual income.c. Division B could increase its profit margin ratio by one percentage point (for example: from 13% to 14%), without increasing total sales or investment. Compute its new residual income. (Round immediate calculations to three decimal places.)d. Division B could reduce its investment so that its asset turnover increased
by one time, while holding total sales and profit constant. Compute its new residual income.
What will be an ideal response?
a. $550,000 - (20% × $1,500,000) = $250,000.
b. ($550,000 + 25,000) - [20% × ($1,500,000 + $100,000)] = $255,000.
c. Current profit margin: $550,000/$3,600,000 = 15.278%; new profit margin = 15.278% + 1% = 16.278%; 16.278% = new profit/$3,600,000; new profit = $586,008; residual income = $586,008 - (20% × $1,500,000) = $286,008.
d. Current asset turnover: $3,600,000/$1,500,000 = 2.4 times; new turnover = 2.4 + 1 = 3.4; 3.4 = $3,600,000/new investment; new investment = $1,058,824; residual income = $550,000 - (20% × $1,058,824) = $338,235.
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