Question

Holo Company reported the following financial numbers for one of its divisions for the year; average assets of $5,950,000; sales of $5,525,000; cost of goods sold of $3,300,000; and operating expenses of $1,162,000. Assume a target income of 13% of average assets. Compute residual income for the division.

Answer 1

$289,500

Step-by-step explanation:

Residual income is calculated as the difference between the actual income and the target income. The target income is 13% of average assets, which is 0.13 * $5,950,000 = $773,500. The actual income is sales - cost of goods sold - operating expenses = $5,525,000 - $3,300,000 - $1,162,000 = $1,063,000. Therefore, the residual income for the division is $1,063,000 - $773,500 = $289,500.