Question

In: Accounting

What is the Residual Income?

Jarren Cough drops operates two divisions. The following information pertains to each division for year 1.

 

Required

 

  1. Compute each division’s residual income.

  2. Which division increased the company’s profitability more?

Solutions

Expert Solution

a. residual Income equals Operating Income - the product of Operating Assets and Desired return on investment

RI= OI -( OA x Desired ROI)

Division A:

RI= $38,400 - (28,000 x 0.12)

RI= $9,600

Division B:

RI= $28,800 - (192,000 x 0.12)

RI= $5,760

b. The division that increased the company's profitability more is Division A.


a. The residual Income for division A is $9,600.

The residual Income for division A is $$5,760.

b. The division that increased the company's profitability more is Division A.

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