Question

Presented below is information related to the Southern Division of Lumber, Inc. Contribution margin $1,212,100 Controllable margin $900,460 Average operating assets $4,093,000 Minimum rate of return 19 % Compute the Southern Division’s return on investment and residual income.

Answer 1

ROI = 22%

Residual Income = $434,430.00

Step-by-step explanation:

Residual Income is measure of how much a division or a part of a business is able to generate over and above the company-wide opportunity cost of capital.

A division with a controllable margin over and above the cost of fund is evaluated to be profitable .

Residual income = Controllable margin - (cost of capital(%)× operating assets)

= 900,460 - (19%× 4,093,000)

= $ 122,790.00

Return on Investment is the proportion of operating assets that earned as controllable margin by the division.

ROI = Contribution margin / Operating assets × 100

ROI = 900460/ 4,093,000 × 100

= 22%