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: $\begin{array}{cc}
& \text { Retall D1vislon }&\text { Wholesale} \
&&\text { Division}\
\text { Operating income } & \$ 2,500,000 &\$6,000,000\
\text { Operating assets } & \$ 16,000,000&\$36,000,000
\end{array}$ 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: $\begin{array}{cc} 
& \text { Retall D1vislon }&\text { Wholesale} \
&&\text { Division}\
\text { Operating income } & \$ 2,500,000 &\$6,000,000\
\text { Operating assets } & \$ 16,000,000&\$36,000,000
\end{array}$  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 is calculated as operating income minus the product of operating assets and the target ROI. For the Wholesale Division: $6,000,000 - (0.15 * $36,000,000) = $600,000.

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