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Question - Blossom 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
$9,900,000
$3,850,000
$3,000,000
Variable expenses
3,850,000
1,400,000
1,700,000
Direct fixed expenses
4,350,000
900,000
1,100,000
Average assets
7,850,000
1,950,000
Required rate of return
12%
a) Calculate the current residual income for each distribution channel.
Residual Income
Retail
$758,000
Online
$1,088,000
Catalog
-$34,000
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 $700,000 and is expected to generate $145,000 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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