The following is divisional information for Falcon Enterprises
East Division West Division
Operating income $250,000 $200,000
Net sales 2,225,000 1,575,000
Total assets at Jan. 1 1,500,000 840,000
Total assets at Dec .31 1,200,000 1,000,000
The target rate of return is 12% for the East Division and is 10% for the West Division.
Compute residual income for each division.
What will be an ideal response
Average assets: (Beginning assets + Ending assets) / 2
East Division = ($1,500,000 + $1,200,000 ) / 2
= $2,700,000 / 2
= $1,350,000
West Division = ($840,000 + $1,000,000 ) / 2
= $1,840,000 / 2
= $920,000
Minimum acceptable operating income = Average assets x Target rate of return
East Division = $1,350,000 x 0.12
= $162,000
West Division = $920,000 x 0.10
= $92,000
Residual income = Operating income — Minimum acceptable operating income
East Division = $250,000 - $162,000 = $88,000
West Division = $200,000 - $92,000 = $108,000
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