Question

question 14. iba industries is a division of a major corporation. the following data are for the latest year of operations:

sales	$5,820,000
net operating income	$436,500
average operating assets	$2,000,000
the company’s minimum required rate of return	18%

required: what is the division’s residual income?

Explanation:

Step1: Recall the formula for residual income

Residual Income (RI) is calculated as Net Operating Income minus the product of Average Operating Assets and the Minimum Required Rate of Return. The formula is:
$$RI = \text{Net Operating Income} - (\text{Average Operating Assets} \times \text{Minimum Required Rate of Return})$$

Step2: Identify the values from the problem

• Net Operating Income = $\$436,500$
• Average Operating Assets = $\$2,000,000$
• Minimum Required Rate of Return = $18\% = 0.18$

Step3: Calculate the minimum required return

First, find the minimum required return by multiplying Average Operating Assets by the Minimum Required Rate of Return:
$$\text{Minimum Required Return} = 2,000,000 \times 0.18 = 360,000$$

Step4: Calculate residual income

Subtract the minimum required return from the Net Operating Income:
$$RI = 436,500 - 360,000 = 76,500$$

Answer:

The division’s residual income is $\$76,500$.