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: Terra Company has set a target return on investment (ROI) of 15% for both divisions
Which of the following statements is accurate?
$$\begin{array} { | l | l | l r | }
\hline & { \text { Retail Division } } & { \text { Wholesale Division } } \
\hline \text { Operating income } & \$ 2,500,000 & \$ 6,000,000 \
\hline \text { Operating assets } & \$ 16,000,000 & \$ 36,000,000 \
\hline
\end{array}$$
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: Terra Company has set a target return on investment (ROI) of 15% for both divisions
Which of the following statements is accurate?
$$\begin{array} { | l | l  | l r | } 
\hline &  { \text { Retail Division } } &  { \text { Wholesale Division } } \
\hline \text { Operating income } & \$  2,500,000 & \$  6,000,000 \
\hline \text { Operating assets } & \$  16,000,000 & \$  36,000,000 \
\hline
\end{array}$$
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

The residual income is calculated as operating income minus the product of the target ROI and operating assets. For the Wholesale Division: $6,000,000 - (0.15 * $36,000,000) = $6,000,000 - $5,400,000 = $600,000.

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