Question

Calculating Residual Income Forchen, Inc., provided the following information for two of its divisions for last year: Sales Operating income Operating assets, January 1 Operating assets, December 31 Small Appliances Cleaning Products Division Division $34,650,000 $31,380,000 2,406,200 1,252,800 6,397,000 5,710,000 7,500,000 6,700,000 Forchen, Inc., requires an 6 percent minimum rate of return.

Answer 1

Answer

• Workings

	Average operating assets	Minimum rate of return	Minimum income expected	Operating Income	Residual Income
	[A = (Jan 1 + Dec 31) / 2	[B]	[C = A x B]	[D]	[E = D - C]
Small Appliances	$6,948,500	6%	$416,910	$2,406,200	$1,989,290
Cleaning Products	$6,205,000	6%	$372,300	$1,252,800	$880,500

• Requirement 1 = $ 1989290
• Requirement 2 = $ 880500
• Requirement 3

	Average operating assets	Minimum rate of return	Minimum income expected	Operating Income	Residual Income
	[A = (Jan 1 + Dec 31) / 2	[B]	[C = A x B]	[D]	[E = D - C]
Small Appliances	$6,948,500	7%	$486,395	$2,406,200	$1,919,805
Cleaning Products	$6,205,000	7%	$434,350	$1,252,800	$818,450

>Small Appliances residual income would DECREASE
>Cleaning Products residual income would DECREASE