Guardian Corporation has two major divisions- Healthcare Products and Pharmaceutical Products.It provides the following information for the year. $$\begin{array} { | l | l | l | }
\hline & \text { Healthcare Division } &{ \begin{array} { c }
\text { Pharmaceutical } \
\text { Division }
\end{array} } \
\hline \text { Net sales } & \$ 160,000 & \$ 1,750,000 \
\hline \text { Operating income } & \$ 46,000 & \$ 218,000 \
\hline \text { Average assets } & \$ 320,000 & \$ 5,540,000 \
\hline \text { Target rate of return } & 12,0 \% & 12,0 \% \
\hline
\end{array}$$ Calculate the residual income for the Healthcare Division.

Question

Guardian Corporation has two major divisions- Healthcare Products and Pharmaceutical Products.It provides the following information for the year. $$\begin{array} { | l | l | l | } 
\hline & \text { Healthcare Division } &{ \begin{array} { c } 
\text { Pharmaceutical } \
\text { Division }
\end{array} } \
\hline \text { Net sales } & \$ 160,000 & \$ 1,750,000 \
\hline \text { Operating income } & \$ 46,000 & \$ 218,000 \
\hline \text { Average assets } & \$ 320,000 & \$ 5,540,000 \
\hline \text { Target rate of return } & 12,0 \% & 12,0 \% \
\hline
\end{array}$$ Calculate the residual income for the Healthcare Division.

Quizplus · Accepted Answer

Residual income is calculated as Operating Income - (Average Assets * Target Rate of Return). For the Healthcare Division, this is $46,000 - ($320,000 * 12%) = $46,000 - $38,400 = $7,600.

Guardian Corporation Has Two Major Divisions- Healthcare Products and Pharmaceutical