What is the Residual Income?

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

Required

Compute each division’s residual income.
Which division increased the company’s profitability more?

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.

Christopher Mann answered 3 years ago

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Zachary Cough Drops operates two divisions. The following information pertains to each division for Year 1. Division A Division B Sales $ 220,000 $ 88,000 Operating income $ 16,500 $ 9,000 Average operating assets $ 60,000 $ 45,000 Company's desired rate of return 11 % 11 % Required Compute each division’s residual income. Which division increased the company’s profitability more?

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What is the Residual Income?

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