James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income (RI) method. Webb is reviewing the followed forecasted information for his division for the coming year: If the imputed interest charge is 15% and Webb wants to achieve an RI target of $2 million, what will costs have to be in order to achieve the target?

Question

James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income (RI) method. Webb is reviewing the followed forecasted information for his division for the coming year:  If the imputed interest charge is 15% and Webb wants to achieve an RI target of $2 million, what will costs have to be in order to achieve the target?

Quizplus · Accepted Answer

To calculate the required costs to achieve the target RI, we need to use the following formula:

RI = Operating Income - (Imputed Interest Rate x Total Assets)

We are given that the target RI is $2 million and the imputed interest charge is 15%. Total assets are provided in the table as $167 million, so we can solve for operating income:

$2,000,000 = Operating Income - (0.15 x $167,000,000)
$2,000,000 = Operating Income - $25,050,000
Operating Income = $2,000,000 + $25,050,000
Operating Income = $27,050,000

Now we can use the formula for operating income:

Operating Income = Sales - Variable Costs - Fixed Costs

Plugging in the values from the table, we get:

$27,050,000 = $56,000,000 - $30,350,000 - Fixed Costs

Solving for fixed costs:

Fixed Costs = $56,000,000 - $30,350,000 - $27,050,000
Fixed Costs = $25,150,000

Therefore, the costs will have to be $25,150,000 in order to achieve the target RI of $2 million. The correct answer is D) $25,150,000.

James Webb Is the General Manager of the Industrial Product