Question

Adrenaline Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports. The following divisional information is available for the past year: .: (Click the icon to view the information.) Adrenaline's management has specified a 16% target rate of return. Compute each division's RI. Interpret your results. Are your results consistent with each division's ROI? First, select the formula to calculate residual income (RI). Operating income - ( Average total assets x Target rate of return ) = RI The Rl for the Snow Sports division is $ . The Rl for the Non-snow Sports division is $ . Both divisions have residual income. This means that the divisions are earning income at a rate that management's minimum expectations. Are your results consistent with each division's ROI? This result is with the ROI calculations. i Data Table Net Sales Operating Average Revenue Income Total Assets $ 5,000,000 $ 850,000 $ 4,700,000 7,900,000 1,343,000 6,900,000 Snow Sports Non-snow Sports ROI 18.1 % 19.5% Print Done

Answer 1

(1)

Residual income = operating income - (average total assets x target rate of return)

for Snow sports division,

residual income = $850000 - ($4700000 x 16%)

= $98000

(2)

for non-snow sports division,

residual income = $1343000 - ($6900000 x 16%)

= $239000

(3)

both divisions have positive residual income this means that the divisions are earning income at a rate that higher than managements minimum expectations

This result is consistent with the ROI calculations