Ivanhoe Decor sells home decor items through three distribution channels—retail stores, the Internet, and catalog sales. Each distribution channel is evaluated as an investment center. Selected results from the latest year are as follows:

	Retail Stores		Internet		Catalog Sales
Sales revenue	$ 10,040,000		$ 3,990,000		$ 3,240,000
Variable expenses	3,990,000		1,540,000		1,840,000
Direct fixed expenses	4,490,000		1,040,000		1,240,000
Average assets	7,990,000		3,990,000		1,690,000
Required rate of return	11%		11%		11%

 

(a.) Calculate the current residual income for each distribution channel.

 

(b.) The corporate office is giving the managers of each channel the option of a customer relationship management system that will allow the managers to gather data about their customers and be more effective in their marketing efforts. The system will cost $ 840,000 and is expected to generate $ 159,000 in additional annual segment margin.

Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system.

 

Answer rating: 100% (QA)

a Calculate the current residual income for each distribution channel Residual income is calculated as the operating income minus the minimum required ... View the full answer