The sales, income from operations, and invested assets for each division of Wren
ID: 2464177 • Letter: T
Question
The sales, income from operations, and invested assets for each division of Wren Company are as follows:
Sales
Income from
Operations
Invested
Assets
Division C
$5,000,000
$630,000
$4,000,000
Division D
6,800,000
760,000
3,900,000
Division E
3,750,000
750,000
7,500,000
Management has established a minimum rate of return for invested assets of 10%.
(a)
Determine the residual income for each division.
(b)
Based on residual income, which of the divisions is the most profitable?
Sales
Income from
Operations
Invested
Assets
Division C
$5,000,000
$630,000
$4,000,000
Division D
6,800,000
760,000
3,900,000
Division E
3,750,000
750,000
7,500,000
Explanation / Answer
Residual income is the exceeding the profit from minimu rate of return Income from Operation (A) Minimum return on assets (B) Residual Income (A-B) A Division C 630,000 400,000 230,000 Division D 760,000 390,000 370,000 Division E 750,000 750,000 - B Based on Residual income Division D is more profitable
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