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Question

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Calculate th residual income of each distribution channel assumingit purchases the new customer efationship anagement.

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 Sslesreveny $9990000  $3940000  $3140000 bY vy a
Variable expenses 3.920.000 1,490,000 1,790,000 Bry
| Diectfoedepenses 4440000 990000 1190000 ay.
3 Average assets 7.940000 3940000 1,750,000
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Calculate the current residual income for each istribution channel. f the residual income sass

VIPSolutions · Accepted Answer

Let's solve the question step by step.

---

## **Step 1: Understand the Residual Income Formula**

**Residual Income = Segment Margin - (Average Assets × Required Rate of)**

-Segment Margin** = Sales Revenue - Variable Expenses - Direct Fixed Expenses
- **Required Rate of Return** = 10% for all channels

---

## **Step 2: Calculate Segment Margin for Each Channel**

### **Retail Stores**
- Sales Revenue: $9,990,000
- Variable Expenses: $3,940,000
- Direct Fixed Expenses: $4,440,000

$$
\text{Segment Margin (Retail)} = \$9,990,000 - \$3,940,000 - \$4,440,000 = \$1,610,000
$$

---

### **Internet**
- Sales Revenue: $3,940,000
- Variable Expenses: $1,490,000
- Direct Fixed Expenses: $990,000

$$
\text{Segment Margin (Internet)} = \$3,940,000 - \$1,490,000 - \$990,000 = \$1,460,000
$$

---

### **Catalog Sales**
- Sales Revenue: $3,140,000
- Variable Expenses: $1,790,000
- Direct Fixed Expenses: $1,190,000

$$
\text{Segment Margin (Catalog)} = \$3,140,000 - \$1,790,000 - \$1,190,000 = \$160,000
$$

---

## **Step 3: Calculate Required Return for Each Channel**

$$
\text{Required Return} = \text{Average Assets} \times \text{Required Rate of Return}
$$

### **Retail Stores**
$$
\$7,940,000 \times 10\% = \$794,000
$$

### **Internet**
$$
\$3,940,000 \times 10\% = \$394,000
$$

### **Catalog Sales**
$$
\$1,750,000 \times 10\% = \$175,000
$$

---

## **Step 4: Calculate Residual Income for Each Channel**

### **Retail Stores**
$$
\$1,610,000 - \$794,000 = \$816,000
$$

### **Internet**
$$
\$1,460,000 - \$394,000 = \$1,066,000
$$

### **Catalog Sales**
$$
\$160,000 - \$175,000 = -\$15,000
$$

---

## **Step 5: Format the Answers**

| Channel       | Residual Income |
|---------------|-----------------|
| Retail        | $816,000        |
| Online        | $1,066,000      |
| Catalog       | ($15,000)       |

---

## **Final Summary**

- **Retail residual income:** $816,000
- **Online residual income:** $1,066,000
- **Catalog residual income:** **($15,000)** (a loss)

These are the current residual incomes for each channel before considering the new customer relationship management system.

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