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Question - Wildhorse 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
$10,000,000
$3,950,000
$3,160,000
Variable expenses
3,950,000
1,500,000
1,800,000
Direct fixed expenses
4,450,000
1,000,000
1,200,000
Average assets
7,950,000
1,730,000
Required rate of return
12%
Required -
(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 $800,000 and is expected to generate $155,000 in additional annual segment margin.
Calculate the residual income of each distribution channel assuming it purchases the new customer relationship management system.
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