Question

The operating income and the amount of invested assets in each division of Stewart Industries are as follows:

Operating Income Invested Assets
Retail Division $71,400 $340,000
Commercial Division 145,800 810,000
Data Analytics Division 132,500 530,000
Assume that management has established a 12% minimum acceptable return for invested assets.

a. Determine the residual income for each division.

Line Item Description Retail Division Commercial Division Data Analytics Division
Operating income $71,400 145,800 132,500
Minimum amount of operating income
Residual income

Answer 1

To calculate residual income for each division of Stewart Industries, subtract the product of the invested assets and the minimum acceptable return rate (12%) from the operating income of each division. The residual incomes are $30,600 for Retail, $48,600 for Commercial, and $68,900 for Data Analytics divisions.

Step-by-step explanation:

The question is asking to calculate the residual income for each division of Stewart Industries. Residual income is found by subtracting the minimum acceptable return on invested assets from the operating income. The minimum acceptable return is calculated by multiplying the invested assets by the minimum acceptable rate of return, which in this case is 12%.

• Retail Division: Minimum acceptable return is 12% of $340,000, which is $40,800. Therefore, residual income = $71,400 - $40,800 = $30,600.
• Commercial Division: Minimum acceptable return is 12% of $810,000, which is $97,200. Therefore, residual income = $145,800 - $97,200 = $48,600.
• Data Analytics Division: Minimum acceptable return is 12% of $530,000, which is $63,600. Therefore, residual income = $132,500 - $63,600 = $68,900.