Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of "residual income"?
A) Division 1
B) Division 2
C) Both divisions have the same return on investment ratio

Question

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
  Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of "residual income"?
A) Division 1 
B) Division 2 
C) Both divisions have the same return on investment ratio

Quizplus · Accepted Answer

Residual Income = Net Operating Income - Investment x Minimum ROI
Division 1:
Net Operating Income: $200,000 - $150,000 = $50,000
Residual Income: $50,000 - (0.05 x $1,000,000) = $0
Division 2:
Net Operating Income: $45,000 - $35,000 = $10,000
Residual Income = $10,000 - (0.05 x $200,000) = $0
Both divisions have the same residual income, $0.

Conner Manufacturing Has Two Major Divisions