The following results pertain to an investment center. Sales $ 1,318,800 Variable costs 720,000 Traceable fixed...
The following results pertain to an investment center.
| Sales | $ | 1,318,800 | |
| Variable costs | 720,000 | ||
| Traceable fixed costs | 84,000 | ||
| Average investment | 990,000 | ||
| Divisional cost of capital (discount rate) | 10 | % | |
How much is the residual income (RI) for this investment center?
Homework Answers
Answer:
Meaning of Residual income :
Residual Income is the amount of profit earned above & beyond require the rate of return.
Calculation of Residual Income as follows:
Residual Income = Income - ( Invested Capital * Required rate of return)
= $ 5,14,800 - ( $ 9,90,000 * 10% )
= $ 5,14,800 - $ 99,000
= $ 4,15,800
Therefore, Residual Income is $ 4,15,800
Working note:
Calculation of income as follows:
Income = Sales - Variable fixed cost - Traceable fixed cost
= $ 13,18,800 - $ 7,20,000 - $ 84,000
= $ 5,14,800
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