Test Sports Company makes snowboards, downhill skis, cross-country skis, skatebo

Question

Test Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, suriboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports. The following divisional information is available for the past year: ?(Click the icon to view the information.) Test's management has specified a 15% target rate of return. Compute each division's RI. Interpret your results. Are your results consistent with each division's ROI? First, select the formula to calculate residual income (RI). RI The RI for the Snow Sports division is S The RI for the Non-snow Sports division is S Both divisions have residual income. This means that the divisions are earning income at a rate that V management's minimum expectations. Are your results consistent with each division's ROI? This result is with the ROl calculations

Explanation / Answer

Formula to calculate residual income (R):

Operating income - (Target rate of return * average total assets)

The RI for snow sports division is $354,000.

(using the above mentioned formula : $969,000 -(15% * 4,100,000) =>$354,000.)

The RI for the non snow sports division is $643,000.

($1,558,000 - (15% * 6,100,000) =>$643,000)

Both divisions have POSITIVE residual income . This means that both the divisions are earning income at a rate that EXCEEDS management's minimum expectations.

This result is CONSISTENT with the ROI calculations.

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