Final answer:
The residual income for the Dartford Company's division is calculated by subtracting the target income from the investment center income. With a target income of 12% on $3,900,000, the target is $468,000. Subtracting this from the actual income of $670,000 gives a residual income of $202,000.
Step-by-step explanation:
The concept of residual income is key in determining the performance of a division within a company. It is the income that remains after subtracting the cost of capital from the operating profit. To calculate the residual income for Dartford Company's division, we will perform the following steps:
First, determine the target income:
Target Income = Average Invested Assets × Target Rate of Return
= $3,900,000 × 12%
= $468,000
Next, calculate the residual income:
Residual Income = Investment Center Income – Target Income
= $670,000 – $468,000
= $202,000
Thus, the residual income for the division is $202,000, which indicates the division has exceeded its minimum required return on average invested assets.