Question

Floors Direct has 4 divisions. Its hardwood flooring division's information follows for 2013:Sales $4,000,000

Controllable margin 250,000
Variable costs 60,000
Average operating assets 1,800,000Floor's required rate of return is 10%. How much is its Residual Income?

Answer 1

The Residual Income for Floors Direct's hardwood flooring division is $70,000.

Step-by-step explanation:

To calculate the Residual Income, we need to subtract the required rate of return from the controllable margin, and then multiply it by the average operating assets:

Residual Income = (Controllable Margin - Required Rate of Return * Average Operating Assets)

Given that the Controllable Margin is $250,000, the Required Rate of Return is 10%, and the Average Operating Assets are $1,800,000, we can calculate the Residual Income as follows:

Residual Income = ($250,000 - 0.10 * $1,800,000)

Residual Income = $250,000 - $180,000

Residual Income = $70,000