Question

Driver Sports Company makes snowboardo, downhillskh, cross country skin, skateboards, surfboards, and wine skates The company has found beneficial to split operations into two divisions based on the imate 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) Driver's management has specified a 15% tage rate of return Compute each division's RlInterpret your results Are your results consistent with each division's RON First, select the formula to calculate residual income (RI) The Rl for the Snow Sports division is The Rl for the Non-snow Sports division is 5 managemen's minimum expectations Both ovisions have residual income. This means that the divisions are carring income at a rate that Are your results consistent with each division's ROI?

Answer 1

Residual income = Operating income - (Average total assets x Target rate of return)

Residual income, Snow sports division  = Operating income - (Average total assets x Target rate of return)

= 1,060,000 - (4,300,000 x 15%)

= 1,060,000 - 645,000

= $415,000

Residual income, Non Snow sports division  = Operating income - (Average total assets x Target rate of return)

= 1,680,000 - (6,400,000 x 15%)

= 1,680,000 - 960,000

= $720,000

Both divisions have positive residual income. This means that the divisions are earning income at a rate that is higher than management's minimum expectations.

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