Question

Selected data from Division A of Green Company are as follows: Sales $ 540,000 Average investment $ 270,000 Operating income $ 108,000 Minimum rate of return 10% Division A's residual income (RI) is:

Answer 1

Division A's residual income (RI) is calculated by subtracting the product of the average investment and the minimum rate of return from the operating income, resulting in a residual income of $81,000.

Step-by-step explanation:

The question asks to calculate the residual income (RI) for Division A of Green Company. To find the residual income, we subtract the product of the average investment and the minimum rate of return from the operating income. First, we calculate the minimum required return which is 10% of the average investment of $270,000, giving us $27,000. Then, we subtract this from the operating income of $108,000, which results in a residual income of $81,000 for Division A.

Thus, the formula used is:

Residual Income (RI) = Operating Income - (Average Investment x Minimum Rate of Return)

And based on the given numbers:

RI = $108,000 - ($270,000 x 10%)

RI = $108,000 - $27,000

RI = $81,000