Question

Assume that divisional income from operations amounts to $215,000 and top management has established 15% as the minimum rate of return on divisional assets totaling $1,000,000. The residual income for the division is

Answer 1

Answer:

$65,000

Explanation:

The computation of the residual income is shown below;

Residual income = Operating income - target income

where,  

Operating income is given in the question  

And, the target income could be calculated by

= Average invested assets × required rate of return

= $1000,000 × 15%

= $150,000

So, the residual income is

= $215,000 - $150,000

= $65,000