Question

Calculating Residual Income

Forchen, Inc., provided the following information for two of its divisions for last year:

	Small Appliances Division	Cleaning Products Division
Sales	$34,650,000	$31,320,000
Operating income	2,276,900	1,252,300
Operating assets, January 1	6,398,000	5,760,000
Operating assets, December 31	7,530,000	6,700,000

Forchen, Inc., requires an 6 percent minimum rate of return.

Required:

1. Calculate residual income for the Small Appliances Division.

$

2. Calculate residual income for the Cleaning Products Division.

$

3. What if the minimum required rate of return was 7 percent? How would that affect the residual income of the two divisions?

Small Appliances Division residual income would be	- Select your answer -higher.lower.unaffected.Item 3
Cleaning Products Division residual income would be

Answer 1

	Small Appliances	Cleaning Products
	Division	Division
Sales	$34,650,000	$31,320,000
Operating income	2,276,900	1,252,300
Operating assets, January 1	6,398,000	5,760,000
Operating assets, December 31	7,530,000	6,700,000
Avg Assets	6,964,000	6230000
Avg return or Residual return	417,840	373,800

If rate 7%

	Small Appliances	Cleaning Products
	Division	Division
Sales	$34,650,000	$31,320,000
Operating income	2,276,900	1,252,300
Operating assets, January 1	6,398,000	5,760,000
Operating assets, December 31	7,530,000	6,700,000
Avg Assets	6,964,000	6230000
Avg return or Residual return	487,480	436,100