Question

The Auto Division of Big Department Store had a net operating income of $560,000, a net asset base of $4,000,000, and a required rate of return of 12%. Sales for the period totaled $3,000,000. The residual income for the period is

Answer 1

Residua income = $80,000

Step-by-step explanation:

Residual income is the excess of the controllable profit over the opportunity cost of capital invested.

It is used to evaluate the financial performance of a division or department.

The a positive residual value indicate a good performance, hence the higher the residual value the better

It is computed as follows:

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

Controllable profit = 560,000,

Interest on capital = × 12% × 4,000,000 = 480,000

Residual income = 560,000 - 480,000= 80,000

Residua income = $80,000