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Katyanochek1 [597]
3 years ago
14

Division ABC has $750,000 invested in assets and earned $200,000 in income. Division XYZ has $800,000 invested in assets and ear

ned $210,000 in income. The company's target rate is 10%. Which division has the highest residual income
Business
1 answer:
Rus_ich [418]3 years ago
4 0

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.

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