Question

Retail Division $155,800 $550,000 Commercial Division 134,000 330,000 Internet Division 146,400 540,000 Assume that management has established a 10% minimum acceptable rate of return for invested assets. a. Determine the residual income for each division.

Answer 1

The Residual Income for each division:

Retail Division = $4,95,000

Commercial Division = $2,97,000

Internet Division = $4,86,000

                        Retail Division   Commercial Division   Internet Division

A. Operating Income   $155,800                 $134,000                  $146,400

B. Minimum acceptable operating income as a % of invested assets:

                        Retail Division   Commercial Division   Internet Division  

Invested assets            $550,000                $330,000         $540,000

(Invested assets x 10%) =  $55,000                 $33,000           $54,000            

C = A - B Residual Income =$4,95,000       $2,97,000       $4,86,000

What is Residual Income?

Residual Income refers to a calculation that provides the amount of money leftover that a company or individual has after all expenses have been paid. The amount of money that is left over after all expenses are covered is typically referred to as residual income, profit, net income, or earnings.

One specific type of meaning for residual income is similar to the terms passive income or residual pay—in that it can represent income earned on a continual basis, not tied to specific amounts of time, and not requiring active work to generate.

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