Answer the following questions using the information below:
The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2012 reported the following results:
The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective residual incomes for the North and South Divisions?
A)$60,000 and $100,000
B)$300,000 and $60,000
C)$300,000 and $100,000
D)$100,000 and a negative $300,000

Question

Answer the following questions using the information below:
The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2012 reported the following results:
  The company's desired rate of return is 10%. Income is defined as operating income.
-What are the respective residual incomes for the North and South Divisions?
A)$60,000 and $100,000 
B)$300,000 and $60,000 
C)$300,000 and $100,000 
D)$100,000 and a negative $300,000

Quizplus · Accepted Answer

Residual income is calculated as operating income minus (average operating assets multiplied by the desired rate of return). For the North Division, the residual income is ($800,000 - ($6,000,000/2 x 0.1)) = $500,000 - $300,000 = $200,000. For the South Division, the residual income is ($400,000 - ($2,000,000/2 x 0.1)) = $400,000 - $100,000 = $300,000. Therefore, the answer is C, with the respective residual incomes for the North and South Divisions being $300,000 and $100,000.

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