Deborah Lewis, general manager of the Northwest Division of Berkshire Co., has significant authority over pricing decisions as well as programs that involve cost reduction/control. The data that follow relate to upcoming divisional operations: Average invested capital: $15,000,000

Annual total fixed costs: $3,900,000

Variable cost per unit: $80

Number of units expected to be sold: 120,000

Assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge.

Top management will promote Deborah to corporate headquarters if her division can generate $200,000 of residual income (RI). If Deborah desires to move to corporate, what adjustment must the division do to the amount of annual total fixed costs?

The revised fixed costs = $3,640,000

Explanation:

Calculation of Residual Income:

Residual Income = Net income - (Invested capital * Minimum required rate of return)

Net Income = Sales - Variable costs - Fixed costs

Net Income = (120,000*132) - (120,000*80) - 3,900,000

Net Income = $2,340,000

Invested capital = $15,000,000

Minimum required rate of return = 16%

Therefore, residual income = $2,340,000 - ($15,000,000 * 16%)

= -$60,000

Hence, adjustment to be made to the amount of fixed costs so that residual income becomes $200,000 = $200,000+$60,000 = $260,000

Therefore, revised fixed costs = $3,900,000 - $260,000 = $3,640,000

support your answer using the data presented. (5 points). 4. based on the information you used to schedule and curve, which product would you recommend the shoe hut focus on, and why? provide details that support your answer. (5 points).