Question

Invested assets, beginning $ 2,692 $ 4,485 Invested assets, ending 2,608 4,415 Sales 2,696 3,940 Operating income 364 649 Assume that each of the company’s divisions has a required rate of return of 5%. Compute residual income for each division

Answer 1

Answer and Explanation:

The computation of the residual income for each division is shown below:

As we know that

Residual income = Operating income - target income

where,

Operating income is given in the question

And, the target income could be calculated by

= Average invested assets × required rate of return

Now

Particulars                         Beverage              Cheese

                                          Division                 Division

Average assets

{(Open + closing) ÷ 2}        $2,650                  $4,450

Required rate of return         5%                         5%

Target income                    $132.50                $222.50

So, the residual income is

Particulars                         Beverage              Cheese

                                          Division                 Division

Operating income           $364                       $649

Less:

Target income               -$132.50                  -$222.50

Residual income             $231.50                   $426.50