Residual Income The income from operations and the amount of invested assets in

Question

Residual Income

The income from operations and the amount of invested assets in each division of Devon Industries are as follows:

Assume that management has established a 10% minimum acceptable rate of return for invested assets.

a. Determine the residual income for each division.

b. Which division has the most residual income?
SelectCommercial DivisionHealth Care DivisionSporting Goods Division

Income from Operations Invested Assets Sporting Goods Division $62,700 330,000 Health Care Division 69,300 330,000 Commercial Division 39,200 280,000

Explanation / Answer

Residual income

=(income from operations-Minimum amount of income from operations)

Hence the most residual income is of Health care division.

Sporting goods division Health care division Commercial divison Income before operations 62700 69300 39200 Minimum amount of income from operations(10%*Average invested assets) (10%*330,000)=33000 (10%*330,000)=33000 (10%*280,000)=28000

Residual income

=(income from operations-Minimum amount of income from operations)

$29700 $36300 $11200

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