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.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 22E: Ellerson Company provided the following information for the last calendar year: During the year,...

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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 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.

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