Question

In August, the Universal Solutions Division of Jugan Corporation had average operating assets of $670,000 and net operating income of $77,500. The company uses residual income, with a minimum required rate of return of 12%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in August?

A. $2,900
B. -$2,900
C. -$9,300
D. $9,300

Answer 1

The Universal Solutions Division's residual income in August was calculated to be -$2,900. This was determined by subtracting the minimum required return on their average operating assets from their net operating income.

Step-by-step explanation:

The question asks us to calculate the residual income for the Universal Solutions Division of Jugan Corporation for the month of August. Residual income is calculated as the net operating income minus the product of the average operating assets and the minimum required rate of return. Given the net operating income of $77,500, average operating assets of $670,000, and a minimum required rate of return of 12%, we can compute the residual income as follows:

• Minimum required return on assets = Average operating assets × Minimum required rate of return
• Minimum required return on assets = $670,000 × 12% = $80,400
• Residual income = Net operating income – Minimum required return on assets
• Residual income = $77,500 – $80,400 = -$2,900

Therefore, the Universal Solutions Division's residual income in August was -$2,900, which corresponds to Option B.