6. Residual Income Please complete the following two questions: A. When determin

Question

6. Residual Income

Please complete the following two questions:

A. When determining residual income, who determines the minimum acceptable rate of return on divisional assets?

Division management

Financial data from the three divisions of the Garafalo Company are shown.

B. Assume that the top management of the Garafalo Company has established 11% as the minimum acceptable rate of return on divisional assets. Calculate the residual income for each division.

top management Department management Employees in charge of purchasing the assets

Division management

Explanation / Answer

A. When determining residual income, who determines the minimum acceptable rate of return on divisional assets?

Division management

In centralised the top management takes all decisions but in decentralised the managers responsible for divisions takes all decisions hence division management

B. Assume that the top management of the Garafalo Company has established 11% as the minimum acceptable rate of return on divisional assets. Calculate the residual income for each division.

$149,800 - (1,016,000 * 11%)

= $38,040

$130,700- (673,000 *11%)

= $56,670

Residual income = Net operating income - ( Average operating assets * minimum rate of return)

top management Department management Employees in charge of purchasing the assets

Division management

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