Question

The Casket Division of Saal Corporation had average operating assets of $1,090,000 and net operating income of $275,200 in January. The company uses residual income to evaluate the performance of its divisions, with a minimum required rate of return of 18%.

Required:

What was the Casket Division's residual income in January?

Answer 1

Minimum required rate of return = 18%

Minimum required income = average operating assets X minimum required rate of return

Minimum required income = $ 1,090,000 X 18% = $ 196,200

Net operating income = $ 275,200

So, Residual income = net operating income - minimum required income

Residual income = $ 275,200 - $ 196,200 = $ 79,000