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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Residual Income

The Avila Division of Maldonado Company had operating income last year of $136,400 and average operating assets of $1,900,000. Maldonado’s minimum acceptable rate of return is 9%.

(Note: Round all answers to two decimal places.)

Required:

  1. 1. Calculate the residual income for the Avila Division.
  2. 2. Was the ROI for the Avila Division greater than, less than, or equal to 9%?

1.

To determine

Compute residual income.

Explanation

Residual Income:

Residual income can be determined by deducting the minimum dollar return on the operating assets of the company from the amount of operating income.

Use the following formula to calculate residual income:

Residual income=Operating income(Minimum rate of return×Average operating assets)

Substitute $136,400 for operating income, 9% for the minimum rate of return and $1,900,000 for the average operating assets in the above formula

2.

To determine

Describe whether the actual ROI is greater than, less than or equal to 9%.

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