Question

Residual Income The income from operations and the amount of invested assets in each division of Beck Industries are as follows: Income from Operations Invested Assets $182,600 830,000 Retail Division Commercial Division 108,000 450,000 Internet Division 186,300 690,000 Assume that management has established a 12% minimum acceptable return for invested assets. a. Determine the residual income for each division. Retail Division Income from operations $182,600 Commercial Division $108,000 45,000 X Internet Division $186,300 69,000 x Minimum acceptable of income from operations 83,000 X Residual income 99,600 X $ 63,000 X $ 117,300 X b. Which division has the most residual income? Retail Division X

Answer 1

a)

Minimum acceptable of income from operations of Retail division = Invested assets x Minimum rate of return

= 830,000 x 12%

= $99,600

Minimum acceptable of income from operations of Commercial division = Invested assets x Minimum rate of return

= 450,000 x 12%

= $54,000

Minimum acceptable of income from operations of Internet division = Invested assets x Minimum rate of return

= 690,000 x 12%

= $82,800

	Retail division	Commercial division	Internet division
Income from operations	182,600	108,000	186,300
Minimum acceptable of income from operations	99,600	54,000	82,800
Residual income	$83,000	$54,000	$103,500

b)

Internet division has the most residual income.

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