Question

Calculate the residual income with the following data: controllable margin $216,270 minimum rate of return 12% average operating assets $3,886,664 round to the nearest whole dollar, no decimal places. note: controllable margin is the same as net income for a segment with control over the costs. minimum rate of return is the same as the cost of capital.

Answer 1

To calculate residual income, subtract the product of the average operating assets and the minimum rate of return from the controllable margin. Using the provided data, the residual income is a negative $250,130, after rounding to the nearest whole dollar.

Step-by-step explanation:

The question requires the calculation of residual income for a business segment using the given data. Residual income is a managerial accounting concept that measures the excess of controllable margin over the minimum rate of return on a company's average operating assets.

The controllable margin provided in the question is $216,270. This figure is comparable to the net income for a business segment after accounting for the costs a manager has control over. The average operating assets amount to $3,886,664, representing the assets used to generate revenue in the business segment. Lastly, the minimum rate of return, akin to the cost of capital, is given as 12%.

To calculate residual income, you apply the formula:

Residual Income = Controllable Margin - (Average Operating Assets × Minimum Rate of Return)

First, we calculate the minimum required return:

Minimum Required Return = $3,886,664 × 12% = $466,399.68 (rounded to the nearest whole dollar results in $466,400)

The next step is to subtract this value from the controllable margin:

Residual Income = $216,270 - $466,400 = -$250,130

Therefore, the residual income is a negative $250,130, rounded to the nearest whole dollar.