Question

The income from operations and the amount of invested assets in each division of Beck Industries are as follows: Income from Operations Invested Assets Retail Division $138,000 $690,000 Commercial Division 138,600 770,000 Internet Division 64,500 430,000 Assume that management has established a 10% minimum acceptable return for invested assets. a. Determine the residual income for each division. Retail Division Commercial Division Internet Division Income from operations $138,000 $138,600 $64,500 Minimum acceptable income from operations as a percent of invested assets Residual income $ $ $ b. Which division has the most residual income

Answer 1

a. Minimum acceptable income from operations as of 10% of invested assets

Retail Division = $690,000 * 10% = $69,000

Commercial Division = $770,000 * 10% = $77,000

Internet Division = $430,000 * 10% = $43,000

Residual Income = Income from Operation - Minimum acceptable income from operations as of 10 percent of invested assets

Retail Division Residual Income = $138,000 - $69,000

= $69,000

Commercial Division Residual Income = $138,600 - $77,000

= $61,600

Internet Division Residual Income = $64,500 - $43,000

= $21,500

b. Retail Division has the most Residual Income with the amount of $69,000