Exercise 15-15 Residual income LO 15-7 Alder Cough Drops operates two divisions.

Question

Exercise 15-15 Residual income LO 15-7 Alder Cough Drops operates two divisions. The following information pertains to each division for 2013 Sales Operating income Average operating assets Company's desired rate of return $218,000 $81,000 S 16,500 9,100 55,000 $44,000 14% 14% Required a. Compute each division's residual income Division A Division B b. Which division increased the company's profitability more? Division A O Division EB References eBook & Resources Worksheet Difficulty 1 Easy n.jpgimages (3)jpg images (2)Jpg chamomile-40149 j.pg O Type here to search

Explanation / Answer

Answer:

Residual income

= Net operating income - (Average operating assets X Minimum required rate of return)

Division A

Division B

Net operating income A)

16500

9100

Average operating assets

55000

44000

Minimum required rate of return (B)

14%

14%

Minimum required income ©

7700

6160

Residual income

8800

2940

Residual income

Division A

8800

Division B

2940

__________________________________________________

2

Division A profitability is more

Division A

Division B

Net operating income A)

16500

9100

Average operating assets

55000

44000

Minimum required rate of return (B)

14%

14%

Minimum required income ©

7700

6160

Residual income

8800

2940

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