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[The following information applies to the questions displayed below.]

A food manufacturer reports the following for two of its divisions for a recent year.

Assume that each of the company’s divisions has a required rate of return of 7%. Compute residual income for each division. (Enter your answers in millions.)

($millions) Beverage Division Cheese Division Invested assets, beginning $ 2,662 $ 4,455 Invested assets, ending 2,593 4,400 Sales 2,681 3,925 Operating income 349 634

Explanation / Answer

Average invested assets=(Beginning invested assets+Ending invested assets)/2

Residual income=

Operating income-(Average invested assets*Required rate of return)

349-(2627.5*0.07)

=$165.075million

634-(4427.5*0.07)

=$324.075million

Beverage Divison Cheese Divison Average invested assets (2662+2593)/2=$2627.50 (4455+4400)/2=$4427.50

Residual income=

Operating income-(Average invested assets*Required rate of return)

349-(2627.5*0.07)

=$165.075million

634-(4427.5*0.07)

=$324.075million

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