Question

Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January?

Multiple Choice
A. $7,900
B. ($20,118)
C. $20,118
D. ($7,900)

Answer 1

Answer:

Residual income = $7900

so correct option is A. $7,900

Explanation:

given data

rate of return = 14%

average operating assets = $970,000

net operating income = $143,700

to find out

What was the Commercial Products Division's residual income

solution

we get here Minimum net operating income that is

Minimum net operating income = rate of return × average operating assets  ..............1

put here value

Minimum net operating income = 14% × $970,000

Minimum net operating income = $135,800

and

so Residual income will be here as

Residual income = net operating income - Minimum net operating income

Residual income = $143,700 - $135,800

Residual income = $7900

so correct option is A. $7,900