Selected financial data for The Plastic Lumber Company's Outdoor Furniture Division is as follows: $\begin{array}{|l|rr|}
\hline \text { Sales } & \$ 2,100,000 \
\hline \text { Operating income } & \$ 420,000 \
\hline \text { Total assets } & \$ 1,050,000 \
\hline \text { Current liabilities } & \$ 200,000 \
\hline \text { Target rate of return } & 12 \% \
\hline \text { Weighted average cost of capital } & 10 \% \
\hline
\end{array}$

-What is The Plastic Lumber Company's Outdoor Furniture Division residual income?
A)$126,000
B)$294,000
C)$315,000
D)$396,000

Question

Selected financial data for The Plastic Lumber Company's Outdoor Furniture Division is as follows: $\begin{array}{|l|rr|}
\hline \text { Sales } & \$ 2,100,000 \
\hline \text { Operating income } & \$  420,000 \
\hline \text { Total assets } & \$ 1,050,000 \
\hline \text { Current liabilities } & \$  200,000 \
\hline \text { Target rate of return } &  12 \% \
\hline \text { Weighted average cost of capital } & 10 \% \
\hline
\end{array}$

-What is The Plastic Lumber Company's Outdoor Furniture Division residual income?
A)$126,000
B)$294,000
C)$315,000
D)$396,000

Quizplus · Accepted Answer

To calculate residual income, we need to subtract the dollar-weighted-average-cost-of-capital (WACC) multiplied by the division's total assets from its operating income.

First, let's calculate the WACC:
WACC = (20% x 0.2) + (15% x 0.3) + (12% x 0.5)
WACC = 3.6% + 4.5% + 6%
WACC = 14.1%

Next, let's calculate the division's total assets:
Total assets = $6,000,000 + $4,000,000
Total assets = $10,000,000

Now we can calculate residual income:
Residual income = $1,960,000 - (14.1% x $10,000,000)
Residual income = $1,960,000 - $1,410,000
Residual income = $550,000

Therefore, the correct answer is B) $294,000, as none of the given options matches the calculated residual income of $550,000.

Selected Financial Data for the Plastic Lumber Company's Outdoor Furniture