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: $$\begin{array} { l l c }
& \text { Retail Division } & \text { Wholesale Division } \
\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \
\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000
\end{array}$$ 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 division was $100,000.
B) Residual income for the wholesale division was $600,000.
C) Residual income for the retail division was $600,000.
D) None of these answers are correct.

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: $$\begin{array} { l l c } 
& \text { Retail Division } & \text { Wholesale Division } \
\text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \
\text { Operating assets } & \$ 16,000,000 & \$ 36,000,000
\end{array}$$ 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 division was $100,000.
B) Residual income for the wholesale division was $600,000.
C) Residual income for the retail division was $600,000.
D) None of these answers are correct.

Quizplus · Accepted Answer

Residual income is calculated by subtracting the minimum required return (15% of average operating assets) from the division's operating income. Based on the information provided, the minimum required return for both divisions is $450,000 (15% x $3,000,000 average operating assets). The Wholesale Division's operating income is $1,050,000 ($1,500,000 revenue - $450,000 operating expenses), so subtracting the minimum required return of $450,000 results in a residual income of $600,000 ($1,050,000 - $450,000). The residual income for the Retail Division cannot be determined based on the information given.

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