Question

Vaughn, Inc. reports the following financial information for its sports clothing segment. Average operating assets $2,915,000 Controllable margin $612,150 Minimum rate of return 8 % Compute the return on investment and the residual income.
a. Return on investment ___.
b. Residual income ____.

Answer 1

Answer:

a. 21

b. $378,950

Explanation:

ROI = (Net operating income / Average operating asset)100

       = ($612,150 / $2,915,000)100

       = 21

Residual income = Net operating income - (average operating asset x               minimum rate of return)

Residual income = $612,150 - ($2,915,000 x 8%)

                            = $612,150-$233,200

                            = $378,950

*we used controllable margin because it is in segmented department wherein fixed cost is more complicated to allocate each department.