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1. Cabell Products is a division of a major corporation. Last year the division had total sales of $27,170,000, net operating income of $2,662,660, and

1. Cabell Products is a division of a major corporation. Last year the division had total sales of $27,170,000, net operating income of $2,662,660, and average operating assets of $8,151,000. The company's minimum required rate of return is 12%.

The division's residual income is closest to:

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  • $1,684,540
  • $2,662,660
  • $(1,956,240)
  • $3,640,780
    2.
    Financial data for Beaker Company for last year appear below:
    Beaker Company
    Statements of Financial Position
    Beginning Balance Ending Balance
    Assets:
    Cash $ 271,000 $ 326,100
    Accounts receivable 168,000 198,000
    Inventory 248,000 292,000
    Plant and equipment (net) 490,000 424,000
    Investment in Cedar Company 260,000 339,000
    Land (undeveloped) 330,000 330,000
    Total assets $ 1,767,000 $ 1,909,100
    Liabilities and owners' equity:
    Accounts payable $ 176,000 $ 228,000
    Long-term debt 862,000 862,000
    Owners' equity 729,000 819,100
    Total liabilities and owners' equity $ 1,767,000 $ 1,909,100

    Beaker Company
    Income Statement
    Sales $ 2,440,000
    Less operating expenses 1,952,000
    Net operating income 488,000
    Less interest and taxes:
    Interest expense $ 99,500
    Tax expense 146,400 245,900
    Net income $ 242,100

    The company paid dividends of $152,000 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.

    Required:

    a. Compute the company's margin, turnover, and return on investment for last year.

    b. The Board of Directors of Beaker Company has set a minimum required return of 35%. What was the company's residual income last year?

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