University Hospital provided the following income statement for two of its divisions: Diagnostic and Outpatient.Both divisions are structured as investment centers.
The average assets for Diagnostic and Outpatient divisions total $400,000 and $600,000,respectively.The required minimum rate of return for both divisions is 10%.
Required:
a.Calculate the current residual income for each division.
b.Why is residual income a better measure of performance for managers of investment centers than the overall profit compared to the flexible budget?

Question

University Hospital provided the following income statement for two of its divisions: Diagnostic and Outpatient.Both divisions are structured as investment centers.
  The average assets for Diagnostic and Outpatient divisions total $400,000 and $600,000,respectively.The required minimum rate of return for both divisions is 10%.
Required: 
a.Calculate the current residual income for each division.
b.Why is residual income a better measure of performance for managers of investment centers than the overall profit compared to the flexible budget?

Quizplus · Accepted Answer

The Answer of University Hospital provided the following income statement for two of its divisions: Diagnostic and Outpatient.Both divisions are structured as investment centers.
  The average assets for Diagnostic and Outpatient divisions total $400,000 and $600,000,respectively.The required minimum rate of return for both divisions is 10%.
Required: 
a.Calculate the current residual income for each division.
b.Why is residual income a better measure of performance for managers of investment centers than the overall profit compared to the flexible budget?

University Hospital Provided the Following Income Statement for Two of Its