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
You might also like to view...
Retail convergence means lower competition for retailers and lower difficulty in differentiating the product assortments of different types of retailers
Indicate whether the statement is true or false
______ is necessary when preliminary and concurrent controls have failed.
a. Salvage control b. Feedforward control c. Damage control d. Rework control
Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an outlier
Indicate whether the statement is true or false
In the retail life cycle, ________ is the stage of emergence of a retail outlet, with a sharp departure from existing competition.
A. accelerated development B. maturity C. early growth D. introduction E. decline