Question

Calculating Residual Income Forchen, Inc., provided the following information for two of its divisions for last year: Small Appliances Division Cleaning Products Division Sales $34,620,000 $31,340,000 Operating income 2,397,700 1,254,300 Operating assets, January 1 6,400,000 5,760,000 Operating assets, December 31 7,590,000 6,640,000 Forchen, Inc., requires an 8 percent minimum rate of return.

Required:

1. Calculate residual income for the Small Appliances Division. $

2. Calculate residual income for the Cleaning Products Division. $

Answer 1

	Small appliances division	Cleaning products division
Average operating assets [ ( Beginning operating assets + Ending operating assets ) / 2 ]	6995000 [ ( 6400000+7590000 ) / 2 ]	6200000 [ ( 5760000+6640000 ) / 2 ]

Required 1 :
Residual income for the Small Appliances Division = Operating income - ( Average operating assets * Minimum rate of return ) = 2397700 - ( 6995000 * 8% )	1838100
Required 2 :
Residual income for the Cleaning Products Division = Operating income - ( Average operating assets * Minimum rate of return ) = 1254300 - ( 6200000 * 8% )	758300