Duncan Ltd.has the following information available for one of its divisions in the current year:
$\begin{array}{lr}
\text { Sales revenue } & \$ 6000000 \
\text { Operating expenses } & 3800000 \
\text { Average operating assets } & 2000000
\end{array}$
Duncan requires each of its divisions to generate a minimum return of 25 per cent.What is this division's residual income?
A) $ 200 000
B) $1 450 000
C) $1 700 000
D) $5 500 000

Question

Quizplus · Accepted Answer

Residual income is calculated as operating income - (minimum required rate of return * total assets).
Operating income = $8,500,000
Minimum required rate of return = 25%
Total assets = $20,000,000

Residual income = $8,500,000 - (0.25*$20,000,000)
Residual income = $3,500,000

Therefore, the division's residual income is $3,500,000 or (C).

Duncan Ltd Duncan Requires Each of Its Divisions to Generate a Minimum