Question

Presented below is selected information for three regional divisions of Medina Company.

Divisions
North West South
Contribution margin $299,200 $499,600 $400,900
Controllable margin $139,500 $360,000 $211,500
Average operating assets $930,000 $2,000,000 $1,410,000
Minimum rate of return 12% 14% 9%

Required:
a. Compute the return on investment for each division.
b. Compute the residual income for each division.

Answer 1

a. Return on investment = Controllable margin / Average operating assets

North Division:

= 139,500 / 930,000

= 15%

West Division:

= 360,000 / 2,000,000

= 18%

South:

= 211,500 / 1,410,000

= 15%

b. Residual income = Controllable margin - (Average operating assets * Minimum rate of return)

North division:

= 139,500 - (930,000 * 12%)

= $27,900

West division:

= 360,000 - (2,000,000 * 14%)

= $80,000

South division:

= 211,500 - (1,410,000 * 9%)

= $84,600