Refer to the data given in Exercise 10-8.

Required:

1. Compute the residual income for each of the opportunities. (Round to the nearest dollar.)

2. Compute the divisional residual income (rounded to the nearest dollar) for each of the following four alternatives:

a. The Ever-Tent is added.

b. The KiddieKamp is added.

c. Both investments are added.

d. Neither investment is made; the status quo is maintained.

Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?

3. Based on your answer in Requirement 2, compute the profit or loss from the divisional manager’s investment decision. Was the correct decision made?

LO1