Duncan Ltd. has the following information available for one its divisions in the current year: Duncan requires each of its divisions to generate a minimum return of 20%. What is this division's residual income?
A) $200,000
B) $450,000
C) $700,000
D) $1,250,000

Question

Duncan Ltd. has the following information available for one its divisions in the current year:  Duncan requires each of its divisions to generate a minimum return of 20%. What is this division's residual income?
A) $200,000 
B) $450,000 
C) $700,000 
D) $1,250,000

Quizplus · Accepted Answer

Residual Income = Operating Income - (Minimum Required Rate of Return * Total Assets)
Given, Minimum required return = 20%
Operating Income = $1,500,000
Total Assets = $6,000,000
Minimum Required Return = 20% of $6,000,000 = $1,200,000
Residual Income = $1,500,000 - $1,200,000 = $300,000
Therefore, the residual income of the division is $300,000, which is only available in option B.