Question

The Atlantic Division of Start Production Company reported the following results for 2020: Sales $5,500,000 Variable Costs $2,200,000 Controllable Fixed Costs $2,540,000 Average Operating Assets $4,000,000 The minimum required rate of return of Start Production Company is 16%.

A. What is the controllable margin of the Atlantic Division for 2020?
B. What is the Return on Investment (ROI) for the Atlantic Division for 2020?
C. What is the Residual Income for the Atlantic Division for 2020?

Answer 1

a. Controllable margin = Sales - Variable costs - Controllable fixed cost

=5,500,000 - 2,200,000 - 2,540,000

= $760000

b. Return on Investment (ROI) = Controllable margin / Average Operating Assets * 100

= 760,000 / 4,000,000 * 100

=0.19 * 100

=19%

c. Residual income = Controllable margin - Minimum required return (4000000 * 16% = 640000)

=760,000 - 640,000

=$120,000