The following information pertains to the three divisions of Merrymount Company: What is the residual income for Division X?
A) $36,000
B) $45,000
C) $(9,000)
D) $(36,000)

Question

The following information pertains to the three divisions of Merrymount Company:  What is the residual income for Division X?
A) $36,000 
B) $45,000 
C) $(9,000) 
D) $(36,000)

Quizplus · Accepted Answer

The residual income formula is operating income - (total assets x required rate of return). From the information provided, Division X has an operating income of $60,000 and total assets of $1,200,000. The required rate of return for Division X is 10%. Therefore, the residual income for Division X is $60,000 - ($1,200,000 x 10%) = -$60,000 + $120,000 = $60,000 - $60,000 = $0. Since the residual income is negative, it means that the division is not generating enough returns to meet the required rate of return, making C the best choice.

The Following Information Pertains to the Three Divisions of Merrymount