Question

spotlight sports company makes snowboards, downhill skis, cross - country skis, skateboards, surfboards, and inline skates. the company has found it beneficial to split operations into two divisions based on the climate required for the sport: snow sports and non - snow sports. the following divisional information is available for the past year.
view the data.
spotlight sports companys management has specified a 17% target rate of return. compute each divisions ri. interpret your results. are your results consistent with each divisions roi?
first, select the formula to calculate residual income (ri).
residual income =
data
snow sports
net sales
revenue
$ 5,500,000
$ 8,400,000
operating
income
$ 990,000
$ 1,512,000
average total
assets
4,600,000
6,600,000
roi
21.5 %
22.9 %

Explanation:

Step1: Recall the residual income formula

Residual Income (RI) = Operating Income - (Average Total Assets × Target Rate of Return)

Step2: Calculate for Snow Sports

Given Operating Income = $990,000, Average Total Assets = $4,800,000, Target Rate of Return = 17%
RI = \(990000-(4800000\times0.17)\)

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Step3: Calculate for Non - snow Sports

Given Operating Income = $1,512,000, Average Total Assets = $6,600,000, Target Rate of Return = 17%
RI=\(1512000-(6600000\times0.17)\)

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Answer:

Snow Sports Residual Income: $174,000; Non - snow Sports Residual Income: $390,000. Both divisions have positive residual income. For Snow Sports, \(RI = 174000>0\), meaning it earns more than the target return on its assets. For Non - snow Sports, \(RI = 390000>0\) also. Since ROI (Return on Investment) for Snow Sports is 21.6% (\(\frac{990000}{4800000}\times100\)) and for Non - snow Sports is 22.9% (\(\frac{1512000}{6600000}\times 100\)), and both have positive RI, the results are consistent with ROI as both are profitable above the target rate.