   Chapter 24, Problem 24.11EX

Chapter
Section
Textbook Problem

Residual income Based on the data in Exercise 24-10, assume that management has established a 9% minimum acceptable return for invested assets. a. Determine the residual income for each division. b. Which division has the most residual income?

(a)

To determine

Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.

Formula of residual income:

 Income from operations XXX Less minimum acceptable income from operations as a percent of invested assets XXX Residual income XXX

Table (1)

To determine: Residual income of for each division

Explanation

Determine residual income of R Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for R Division.

Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $30,000,000×9%=$2,700,000

Step 2: Determine residual income of R Division.

 Particulars Amount ($) Income from operations$5,400,000 Less minimum acceptable income from operations as a percent of invested assets 2,700,000 Residual income $2,700,000 Table (2) Determine residual income of C Division. Step 1: Compute minimum acceptable income from operations as a percent of invested assets for C Division. Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}=$25,000,000×9%= \$2,250,000

Step 2: Determine residual income of C Division

(b)

To determine
The division with highest residual income

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