Anderson & Co. is a manufacturing company that has two major investment centers.
ID: 2408323 • Letter: A
Question
Anderson & Co. is a manufacturing company that has two major investment centers. Both divisions have required a significant investment, and management wants to compare the performance of the two divisions. Below is information related to the two divisions.
Management currently requires investments to meet a rate of return on asset investment of 5%.
What is the residual income for Division 1?
Division 1 Division 2 Sales $40,000 $80,000 Expenses $25,000 $50,000 Asset Investment $100,000 $500,000Explanation / Answer
The residual income = Net Operating Income - ( Asset Investment * rate of return on asset investment )
= ( Sales - Expenses ) - ( Asset Investment * rate of return on asset investment )
= ( $ 40,000 - $ 25,000) - ( $ 100,000 * 5%)
= $ 15,000 - 5,000
= $ 10,000
Hence the correct answer is $ 10,000