Answer:
Division XYZ has the highest residual income
Explanation:
Residual income is the excess of the controllable profit over the opportunity cost of capital invested.
It is used to appraise and evaluate the performance of separate divisions of the same company where different managers are responsible for each
It is computed as follows:
Residual income = Controllable profit - (cost of capital× operating assets)
<em>Division ABC</em>
Residual income = 200,000 - (10%×750,000) = $125,000
Residual income= $125,000
<em />
<em>Division XYZ</em>
Residual income = 210,000 - (10% ×800,000) = $130
,000
Residual income= $130,000
Division XYZ has a higher residual income of $130,000 compared to the $125,000 of division ABC. A difference of $5,000 higher.
