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	$154,000		$770,000
Commercial Division	139,400		820,000
Internet Division	62,400		260,000

Assume that management has established a 12% minimum acceptable return for invested assets.

a. Determine the residual income for each division.

	Retail Division			Commercial Division			Internet Division
Income from operations	$154,000			$139,400			$62,400
Minimum acceptable income from operations as a percent of invested assets
Residual income	$			$			$

b. Which division has the most residual income?

Answer 1

a)

Retail Division:

Income from operation = 154000

Minimum acceptable income = Invested assets*12?

= 770000*12? = 92400

Residual income = 154000 - 92400 = 61600

Commercial Division:

Income from operation = 139400

Minimum acceptable return = 139400*12?= 16728

Residual income = 139400 - 16728 = 122672

Internet Division:

Income from operation = 62400

Minimum acceptable return = 62400*12? = 7488

Residual income = 62400 - 7488 = 54912

b)

Commercial Division has the most residual income.