Question

Use the following information for the quick study below. (Algo) Skip to question [The following information applies to the questions displayed below.] The following information is provided for each investment center. Investment Center Income Average Assets Cameras $4,750,000 $23,300,000 Phones $2,870,000 $20,500,000 Computers $1,100,000 $17,800,000 QS 22-13 (Algo) Computing Residual Income LO A1 - - - - - - - - -

a) $450,000
b) $1,520,000
c) $2,370,000
d) $4,750,000

Answer 1

The residual income for the investment center is (a) $450,000.

Step-by-step explanation:

The question is asking us to compute the residual income for the investment center. Residual income is a measure of how well the center is performing relative to its average assets. It is calculated by subtracting the required return on assets from the center's income.

The required return is calculated by multiplying the center's average assets by the cost of capital. Let's calculate the residual income for each investment center:

Cameras: Residual Income = $4,750,000 - ($23,300,000 imes 0.1) = $4,750,000 - $2,330,000 = $2,420,000

Phones: Residual Income = $2,870,000 - ($20,500,000 imes 0.1) = $2,870,000 - $2,050,000 = $820,000

Computers: Residual Income = $1,100,000 - ($17,800,000 imes 0.1) = $1,100,000 - $1,780,000 = ($680,000)

Therefore, the residual income for the investment center is:

(a) $450,000