Question

Required information Use the following information for the Exercises below. [The following information applies to the questions displayed below.]

A food manufacturer reports the following for two of its divisions for a recent year.

($millions) Beverage Division Cheese Division
Invested assets, beginning $ 2,500 $ 4,700
Invested assets, ending 2,400 4,600
Sales 2,684 3,928
Operating income 352 637

Assume that each of the company’s divisions has a required rate of return of 6.00%. Compute residual income for each division. (Enter your answers in millions.)

Answer 1

BEVERAGE DECISION ($million) 205

CHEESE DECISION ($million) 358

Step by Step Explanation:

($millions) Beverage Division, Cheese Division

Average assets 2,440 4,650

Targeted return 6% 6%

Target income 147 279

Residual income

Operating income 353 637

Less target income (147) (279)

Residual Income 205, 358

Therefore the residual income for each division is:

BEVERAGE DECISION ($million) 205

CHEESE DECISION ($million) 358

Average asset

Beverage Decision

2,500+2400/2

4,900/2

=2,450

Cheese Decision

4,700+4,600/2

9,300/2

=4,650

Target income

Beverage Decision

6%×2,450=147

Cheese Decision

6%×4,650=279

Answer 2

Computation of residual income

Beverage Division Cheese Division

$'million $'million

Operating Income 352 637

Imputed Cost (147) (257)

Residual Income 205 358

Step-by-step explanation:

step 1 : determine the average invested asset of bboth dividion

beverage division = ( 2500+2400)/2 = 2450

Cheese dividion = (4700 + 4600)/2 = 4650

step 2 : multiply the average invested asset calculated above by the required rate of return of the company to get imputed cost

Beverage Division= 6.00%* 2450 = 147

Cheese division = 6.00% * 4650 = 275

step 3 : deduct the result in step 2 from the operating cost in order to determine the residual income of each dividion.