Question

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?

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)