Business, 05.07.2020 14:01 lex3340

Oscar Clemente is the manager of Forbes Division of Pitt. Inc . a manufacturer of biotech products. Forbes Division, which has $4.060.000 in assets, manufactures a special testing device. At the beginning of the current year. Forbes invested $5.130.000 in automated equipment for test machine assembly. The division's expected income statement at the beginning of the year was as follows:Sales revenue $16,030,000Operating costs Variable 2,070,000Fixed (all cash) 7,500,000Depreciation New equipment 1,560,000Other 1,340,000Division operating profit $3,560,000A sales representative from LSI Machine Company approached Oscar in October LSI has for $5.070.000 a new assembly machine that offers significant improvements over the equipment Oscar bought at the beginning of the year. The new equipment would expand division output by 10 percent while reducing cash fixed costs by 5 percent. It would be depreciated for accounting purposes over a three-year life. Depreciation would be net of the $612.000 salvage value of the new machine. Pitt uses a cost of capital of 12 percent in computing residual income. If Oscar purchases the new machine, it must be installed prior to the end of the year. For practical purposes, though. Oscar can ignore depreciation on the new machine because it will not go into operation until the start of the next year. The old machine, which has no salvage value, must be disposed of to make room for the new machine. Pitt has a performance evaluation and bonus plan based on residual income. Required:What is Forbes Division's residual income if Oscar does not acquire the new machine?

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Oscar Clemente is the manager of Forbes Division of Pitt. Inc . a manufacturer of biotech products....

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