Holo Company reported the following financial numbers for one of its divisions for the year; average total assets of $5,800,000; sales of $5,375,000; cost of goods sold of $3,225,000; and operating expenses of $1,147,000. Assume a target income of 15% of average invested assets. Compute residual income for the division:
A) $133,000.
B) $196,750.
C) $150,450.
D) $100,300.
E) $150,500.

Question

Quizplus · Accepted Answer

Residual income is calculated as the operating income minus the target income. Operating income is sales minus cost of goods sold and operating expenses: $5,375,000 - $3,225,000 - $1,147,000 = $1,003,000. Target income is 15% of average total assets: 0.15 * $5,800,000 = $870,000. Residual income is $1,003,000 - $870,000 = $133,000.

Holo Company Reported the Following Financial Numbers for One of Its