Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year: Terra Company has set a target return on investment (ROI) of 15% for both divisions Which of the following statements is accurate?
A) Residual income for the wholesale sales division was $100,000
B) Residual income for the wholesale sales division was $600,000
C) Residual income for the retail sales division was $600,000
D) None of these.

Question

Terra Company has two divisions, the Retail Division and the Wholesale Division. The following information was gathered for the two divisions for the current year:  Terra Company has set a target return on investment (ROI) of 15% for both divisions Which of the following statements is accurate?
A) Residual income for the wholesale sales division was $100,000 
B) Residual income for the wholesale sales division was $600,000 
C) Residual income for the retail sales division was $600,000 
D) None of these.

Quizplus · Accepted Answer

Residual income = Operating income − (Operating assets × Desired ROI)
Retail division:
Residual income = $2,500,000 − ($16,000,000 × 15%) = $100,000
Wholesale division:
Residual income = $6,000,000 − ($36,000,000 × 15%) = $600,000

Terra Company Has Two Divisions, the Retail Division and the Wholesale