Residual Income and Investment Decisions

Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division.

Furniture Division:
	Year 1	Year 2
Sales	$35,300,000	$37,600,000
Operating income	1,380,000	1,590,000
Average operating assets	2,190,000	2,190,000

Houseware Division:
	Year 1	Year 2
Sales	$12,000,000	$13,000,000
Operating income	610,000	600,000
Average operating assets	5,700,000	5,700,000

At the end of Year 2, the manager of the Houseware Division is concerned about the divisions performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor. 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:

	Espresso-Pro	Mini-Prep
Operating income	$28,000	$15,400
Outlay	150,000	100,000

Jarriots 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 companys minimum required rate of return, 8 percent.

2. Compute the divisional residual income for each of the following four alternatives:

a. The Espresso-Pro is added. $ 166000 Incorrect

b. The Mini-Prep is added. $155400 Incorrect

c. Both investments are added. $ 177400Incorrect

If you could please help me to correct the answers because they are all incorrect and I don't see my mistakes. Thank you