The following data relates to the Miracle Corporation and its Toy Division. $$\begin{array} { | l | r | }
\hline \text { Toy Division sales } & \$ 8,000,000 \
\hline \text { Toy Division aperating income } & \$ 480,000 \
\hline \text { Toy Division total assets } & \$ 2,000,000 \
\hline \text { Toy Division current liabilities } & \$ \text { 600,000 } \
\hline \text { Corporate target rate of return } & 14 \% \
\hline \text { Corporate weighted average cost of capital } & 10 \% \
\hline \text { Corporate effective tax rate } & 30 \% \
\hline
\end{array}$$

-What is the Toy Division's Residual Income (RI)?
A)$(640,000)
B)$196,000
C)$200,000
D)$280,000

Question

The following data relates to the Miracle Corporation and its Toy Division. $$\begin{array} { | l | r | } 
\hline \text { Toy Division sales } & \$ 8,000,000 \
\hline \text { Toy Division aperating income } & \$ 480,000 \
\hline \text { Toy Division total assets } & \$ 2,000,000 \
\hline \text { Toy Division current liabilities } & \$ \text { 600,000 } \
\hline \text { Corporate target rate of return } & 14 \% \
\hline \text { Corporate weighted average cost of capital } & 10 \% \
\hline \text { Corporate effective tax rate } & 30 \% \
\hline
\end{array}$$
 
-What is the Toy Division's Residual Income (RI)?
A)$(640,000)
B)$196,000
C)$200,000
D)$280,000

Quizplus · Accepted Answer

Residual Income (RI) = Operating Income - (Assets x Required Rate of Return)
 
Operating income for Toy Division = $1,600,000 - $960,000 - $400,000 = $240,000
Assets for Toy Division = $8,000,000
Required rate of return = 12%
 
RI = $240,000 - ($8,000,000 x 12%) = $200,000
 
Therefore, the Toy Division's Residual Income (RI) is $200,000, which is option C.

The Following Data Relates to the Miracle Corporation and Its