Residual Income The income from operations and the amount of invested asets in e

Question

Residual Income The income from operations and the amount of invested asets in each division of Beck Industries are as folows Income from Operations Invested Assets Retail Division Commercial Division Internet Division Assume that management has established a 9% minimum acceptable return for invested assets. $5,400,000 6,250,000 1,800,000 $30,000,000 25,000,000 12,000,000 a. Determine the residual income for each division. Retail Division Commercial Division Internet Division Income from operations 15,400,000 6,250,000 $1,800,000 Mirimum acceptable income from operations as a percent of invested assnts Residual income b. Which division has the most residual income Commercial Divislon v

Explanation / Answer

Minimum acceptable return for invested assets= 9%

Retail Division-

Invested assets = $30000000

Minimum acceptable rerurn = $30000000 × 9%

= $2700000

Income from operations = $5400000

Residual Income = $5400000 - $2700000

= $2700000

Commercial Division-

Invested Assets = $25000000

Minimum acceptable rerurn = $25000000 × $9%

= $2250000

Income from operations = $6250000

Residual Income = $6250000 - $2250000

= $4000000

Internet Division-

Invested Assets = $12000000

Minimum acceptable return = $12000000 × 9%

= $1080000

Income from operations = $1800000

Residual Income = $1800000 - $1080000

= $720000

Residual Income from

Retail Division = $ 2700000

Commercial Division = $4000000

Internet Division = $720000

Division having highest residual income =

Commercial Division = $4000000

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