The following information pertains to the three divisions of Marlow Company: $\begin{array}{lrrr}
& \underline{\text { Division} X} & \underline{\text { Division } Y} & \underline{ \text { Division Z }}\
\text { Sales } & ? & ? & 1,250,000 \
\text { Net operating income } & \$ 36,000 & \$ 25,000 & \$ 75,000 \
\text { Average operating assets } & 300,000 & ? & ? \
\text { Return on investment } & ? & 20 \% & 15 \% \
\text { Margin } & 0.10 & 0.05 & ? \
\text { Turnover } & 1.5 & ? & ? \
\text { Target ROI } & 15 \% & 12 \% & 10 \%
\end{array}$ What is the residual income for Division X?
A)$(36,000)
B)$(9,000)
C)$36,000
D)$45,000

Question

Quizplus · Accepted Answer

To calculate the residual income, we need to subtract the minimum rate of return (MRR) from the operating income (OI) and then multiply it by the average operating assets (AOA).
For Division X:

OI = $90,000 
MRR = 12% x $600,000 = $72,000 
AOA = ($1,000,000 + $500,000) / 2 = $750,000

Residual Income = OI - MRR x AOA 
= $90,000 - $72,000 x $750,000 / 100 
= $9,000

Therefore, the residual income for Division X is $(9,000). Option B is the correct answer.

The Following Information Pertains to the Three Divisions of Marlow