Question

g here are three divisions in Company Z. Here are their operating results: Division A Division B Division C Operating Income $12,000 $10,000 $16,000 Average Operating Assets (invested capital) $42,000 $45,000 $80,000 Sales $120,000 $100,000 $160,000 Cost of Capital is 12% for this company (this is the cost of their money, the debt and equity they need to finance their business). Which division of company Z is the top performer?

Answer 1

Answer:

Division A  has the  residual income of $6,960. Hence, it is the top performer

Explanation:

Using the residual income performance metric, the division with the highest residual would be considered the top performer.

Residual income = Net operating income - (cost of capital × Operating assets)

Division A= 12,000 - (12%× 42,000)= 6960

Division B = 10,000 - (12% × 45,000)= 4600

Division C = 16,000 - (12% × 80,000)= 6400

Division A  has the  residual income of $6,960. Hence, it is the top performer