Question

Holo Company reported the following financial numbers for one of its divisions for the year; average total assets of $5,860,000; sales of $5,435,000; cost of goods sold of $3,255,000; and operating expenses of $1,153,000. Assume a target income of 15% of average invested assets. Compute residual income for the division:

Answer 1

Answer:

$148,000

Explanation:

The calculation of the residual income is presented below:

= Net income - minimum return

where,  

Net income equal to

= Sales - cost of goods sold - operating expenses

= $5,435,000 - $3,255,000 - $1,153,000

= $1,027,000

And, the target income equal to

= Average total assets × rate given

= $5,860,000 × 15%

= $879,000

So, the residual income would be

= $1,027,000 - $879,000

= $148,000