Question

Investment Center Net Income Average Assets Cameras and camcorders $ 6,900,000 $ 29,000,000 Phones and communications 1,548,000 12,900,000 Computers and accessories 800,000 16,600,000 Assume a target income of 12% of average invested assets. Required: Compute residual income for each division. (Enter losses with a minus sign.)

Answer 1

Residual Income = Net Income minus (target income)

Target income = rate of returns x operational Assets

A.

Cameras and camcorders investment centre

Residual income = 6,900,000 - (12% x 29,000,000)

= $3,420,000

B.

Phones and communications investment centre

Residual income = 1,548,000 - (12% x 12,900,000)

= $0

C.

Computers and accessories investment centre

Residual income = 800,000 - (12% x 16,600,000)

= -$1,192,000