Question

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

Residual Income

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

Income from Operations Invested Assets
Retail Division $48,000 $240,000
Commercial Division 76,500 450,000
Internet Division 43,500 290,000

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

a. Determine the residual income for each division.

Retail Division Commercial Division Internet Division
Income from operations $48,000 $76,500 $43,500
Minimum acceptable income from operations as a percent of invested assets
Residual income $ $ $

b. Which division has the most residual income?

Homework Answers

Answer #1

a) Calculation of Residual Income for Each Division (Amts in $)

Particulars Retail Division Commercial Division Internet Division
Income from Operations 48,000 76,500 43,500
Less: Minimum acceptable income from operations as a percent of invested assets (Invested Assets*10%) (240,000*10%) = (24,000) (450,000*10%) = (45,000) (290,000*10%) = (29,000)
Residual Income 24,000 31,500 14,500

b) The retail division has the most residual income (i.e. $24,000). (as calculated in part a)

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