Westerville Company reported the following results from last year's operations:
| Sales |
$ |
1,200,000 |
| Variable expenses |
|
320,000 |
|
|
|
| Contribution margin |
|
880,000 |
| Fixed expenses |
|
640,000 |
|
|
|
| Net operating income |
$ |
240,000 |
|
|
|
| Average operating assets |
$ |
600,000 |
This year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics:
|
|
| Sales |
$ |
240,000 |
|
| Contribution margin ratio |
|
50 |
% of sales |
| Fixed expenses |
$ |
84,000 |
|
The company's minimum required rate of return is 15%.
1. What is last year's residual income?
2. What is the residual income of this year's investment opportunity?
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?