Question

Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $790,000 and net operating income of $148,700. What was the Commercial Products Division's residual income in January

Answer 1

Answer:

The Commercial Products Division's Residual income in January is                              $ 37,400.

 

Explanation:

 

Residual income (which is a Managerial Accounting concept) is what remains from a departments income after the opportunity cost of the capital that it deploys has been removed.

The formula is given below:

Residual Income (RI) = Controllable Margin (CM) - Required Rate of Return (RRR) × Average Operating Assets (AOR)

Step I:

Insert all the given factors

RI = 148,000 - (14% x 790,000)

RI = 148,000 - 110600

Therefore, residual income RI = $ 37,400

Cheers!