Residual Income and Investment Decisions Allard, Inc., presented two years of data for its Frozen Foods Division and its Canned Foods Division. Frozen Foods Division: Sales Operating income Average operating assets Year 1 Year 2 2 $35,600,000 $37,700,000 1,410,000 1,530,000 3,070,000 3,070,000 Canned Division: Year 1 Year 2 Sales $11,900,000 $12,700,000 Operating income 640,000 590,000 Average operating assets 5,750,000 5,750,000 At the end of Year 2, the manager of the Canned Division is concerned about the division's performance. As a result, he is considering the opportunity to invest in two independent projects. The first is juice boxes for elementary school children. The second is fruit and veggie pouches for kids on the go. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows: Juice Box Fruit Pouch Operating income $28,000 $ $15,300 Outlay 160,000 110,000 Allard'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 percent. Required: 1. Compute the residual income for each of the opportunities. (Round to the nearest dollar.) Juice Box residual income $ a Fruit Pouch residual income 2. Compute the divisional residual income for each of the following four alternatives: (Round to the nearest dollar.) ) a. The juice box is added. . b. The fruit pouch is added. c. Both investments are added. c $ 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? Both projects 3. Assuming that management acts as you recommend in requirement 2, compute the change in profit (loss) from the divisional manager's investment decision. Profit 43,330 x Was the correct decision made? Yes