Calculator Residual Income The income from operations and the amount of invested

Question

Calculator Residual Income The income from operations and the amount of invested assets in each division of Devon Industries are as follows Income from Operations Invested Assets Sporting Goods Division Health Care Division Commercial Division Assume that management has established a 12% minimum acceptable rate of return for invested assets a. Determine the residual income for each division. $132,000 73,800 112,500 660,000 410,000 750,000 Sporting Goods Division Health Care Division Commercial Division Income from operations $132,000 $73,800 $112,500 Minimum amount of income from operations Residual income b. Which division has the most residual income? Previous Next Il work saved

Explanation / Answer

Part a)

Calculation of Residual Income

Sporting Goods Division

Health care Division

Commercial Division

Income from Operations

$     132,000.00

$    73,800.00

$ 112,500.00

Minimum Amount of Income from Operations

$       79,200.00

$    49,200.00

$    90,000.00

Residual Income

$       52,800.00

$    24,600.00

$    22,500.00

Residual income is the amount of income left after earning minimum return on Investment. In other words Residual income is income over and above minimum return.

Working note for Minimum Return

Sporting Goods Division

Health care Division

Commercial Division

(A)

Invested Assets

$     660,000.00

$ 410,000.00

$ 750,000.00

(B)

Minimum Return on Assets

12%

12%

12%

(A*B)

Minimum Return on Assets in Amount

$       79,200.00

$    49,200.00

$    90,000.00

Part b) Sporting goods Division has the Most Residual Income.

Part a)

Calculation of Residual Income

Sporting Goods Division

Health care Division

Commercial Division

Income from Operations

$     132,000.00

$    73,800.00

$ 112,500.00

Minimum Amount of Income from Operations

$       79,200.00

$    49,200.00

$    90,000.00

Residual Income

$       52,800.00

$    24,600.00

$    22,500.00

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