Question

Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January?

Answer 1

Answer:

The answer is $7,900

Explanation:

Formula of Residual Income=Net Operating Income-(minimum required rate of return*average operating assets)

Residual income (RI)=$143,700-($970,000*14%)

RI=$7,900

Further we can alsocalculate

Return on investment (ROI)=$143,700/$970,000=14.81%

Answer 2

Answer: $7,900

Explanation:

Given the following ;

Minimum rate of return = 14%

Average operating asset = $970,000

Net operating income = $143,700

The residual income may be explained as the excess income a person has after deducting all expenses.

However, in the case of Mike Corporation, the residual income is the excess a corporation has after exceeding the minimum rate of return on it's investment.

Mathematically,

RESIDUAL INCOME(RI) =Net income - (minimum rate of return × average operating asset)

RI = $143,000 - (0.14 × $970,000)

RI = $143,700 - $135,800

RI = $7,900