Question

question content area magnolia company's division a has operating income of $85,900 and assets of $306,000. the minimum acceptable return on investment is 14%. what is the residual income for the division?

Answer 1

The residual income of Magnolia Company's Division A is calculated by subtracting the product of the minimum acceptable return on investment (14% of $306,000) from the operating income of $85,900, which results in $43,060.

Step-by-step explanation:

The question asks about calculating the residual income for Magnolia Company's Division A, given its operating income and assets, and a specified minimum acceptable return on investment (ROI).

To calculate residual income, we subtract the product of the minimum acceptable ROI and the assets from the operating income:

• Minimum acceptable ROI = 14%
• Operating income = $85,900
• Assets = $306,000
• Minimum acceptable ROI × Assets = 0.14 × $306,000 = $42,840

Residual Income = Operating Income - (Minimum acceptable ROI × Assets)

Residual Income = $85,900 - $42,840 = $43,060

Therefore, the residual income for Division A is $43,060.