Question

The following information pertains to the three divisions of Marlow Company:

Division X Division Y Division Z
Sales ? ? $1,250,000
Net operating income $36,000 $25,000 $75,000
Average operating assets $300,000 ? ?
Return on investment ? 20% 15%
Margin 0.10 0.05 ?
Turnover 1.2 ? ?
Target ROI 15% 12% 10%

What is the residual income for Division X?

a.$45,000
b.$(9,000)
c.$36,000
d.$(36,000)

Answer 1

Answer:

The correct option is B

Residual income = ($9000)

Explanation:

Residual Income is measure of how much a division or a part of a business is able to generate over and above the company-wide opportunity cost of capital.  

A division with a controllable  over and margin over and above the cost of fund is evaluated to be profitable .

Residual income = Controllable margin - (cost of capital(%)× operating assets)

Cost of capital = Target ROI

Residual income for Division X

=  36,000 - (15%× 300,000 )

= ($9000)