Question

The records of Skilling Inc. include the following information on one of its departments, which is considered an investment center. Sales totaled $9,800,000 and investment center income totaled $766,500 for the most recent year. Investment center average invested assets were $3,650,000 during that year. Top management has set a target income of 11.5% of investment center assets. What is the department's residual income

Answer 1

Residual income= 346,750

Step-by-step explanation:

Residual income is the excess of the controllable profit over the opportunity cost of capital invested.

It is used to evaluate the financial performance of a division or department

It is computed as follows:

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

Net income - 766,500

investment asset-3,650,000

Cost of capital - 11.5%

Residual income = 766,500 - (11.5%×3,650,000) = 346750

Residual income= 346,750