# residual income related questions

• 1 Residual income

The sales, income from operations, and invested assets for each division of Winston Company are as follows:Sales Income fromOperations InvestedAssetsDivision C \$5,000,000 \$630,000 \$3,900,000Division D 6,800,000 760,000 4,300,000Division E 3,750,000 750,000 7,250,000Management has established a minimum rate of return for invested assets of 8%.(a) Determine the residual income for each division.(b) Based on residual income, which of the divisions is the most profitable?

• 2 residual income

• 3 How does EVA differ from residual income?

How does EVA differ from residual income?

• 4 Return on Investment (ROI) and Residual Income

PROBLEM 11-14 Return on Investment (ROI) and Residual Income [LO1, LO2]“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products' East Division. “But I want to see the numbers before I makea move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown.”Kirsi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisionalmanagers who have the highest ROI. Operating results for the company's East Division for last year are given below:The company had an overall ROI of 18% last year (considering all divisions). The company's East Division has an opportunity to add a new product line that wouldrequire an investment of \$3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:Required:1.Compute the East Division's ROI for last year; also compute the ROI as it would appear if the new product line is added.p. 5012.If you were in Fred Halloway's position, would you accept or reject the new product line? Explain.3.Why do you suppose headquarters is anxious for the East Division to add the new product line?4.Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.a.Compute the East Division's residual income for last year; also compute the residual income as it would appear if the new product line is added.b.Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line? Explain.

• 5 Duncan Corporation is considering the use of residual income as a measure of the

Duncan Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?This method doesn’t make allowances for difference in the size of compared divisions.Opportunities may be undertaken which will decrease the overall return on investment.The minimum required rate of return may eliminate desirable opportunities from consideration.Residual income doesn’t measure how effectively the division manager controls costs.

• 6 Investment Center Analysis; ROI and residual income

Division ARevenues................\$500,000Operating Income.......\$60,000Operating assets........\$250,000Margin...................???????????Turnover................???????????ROI.......................???????????Residual Income........???????????Division BRevenues.................???????????Operating Income.......???????????Operating assets.........\$600,000Margin.....................12%Turnover..................1 turnROI.........................???????????Residual Income..........???????????Division CRevenues..................?????????Operating Income........\$80,000Operating assets..........?????????Margin.....................?????????Turnover..................2 turnsROI.........................?????????Residual Income.........\$20,000A.) Calculate the missing amounts for each division.B.) Comment on the performance of each division.C.) Provide an example to show how residual income improves decision-making at the divisional level.

• 7 Dorcas Corporation is considering the use of residual income as a measure of the

Dorcas Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?This method doesn’t make allowances for difference in the size of compared divisions.Opportunities may be undertaken which will decrease the overall return on investment.The minimum required rate of return may eliminate desirable opportunities from consideration.Residual income doesn’t measure how effectively the division manager controls costs.

• 8 Residual income questions and investment questions

A company's average operating assets are \$220,000 and its net operating income is \$44,000. The company invested in a new project, increasing average assets to \$250,000and increasing its net operating income to \$49,550. What is the project's residual income if the required rate of return is 20%?1. (\$600)2. \$8003. (\$450)4. \$600Deskin Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 19%. In February, the CommercialProducts Division had average operating assets of \$780,000 and net operating income of \$139,800. What was the Commercial Products Division's residual income inFebruary?1. -\$8,4002. -\$26,5623. \$9,4004. \$26,562A company that has a profit can increase its return on investment by:1. increasing sales revenue and operating expenses by the same dollar amount2. increasing sales revenue and operating expenses by the same percentage3. increasing average operating assets and operating expenses by the same dollar amount4. decreasing average operating assets and sales by the same percentage

• 9 what are the arguments of high income, middle income, low income and corporate tax payers who are critical o the Canadian government's income tax policy

what are the arguments of high income, middle income, low income and corporate tax payers who are critical o the Canadian government's income tax policy.

• 10 calculate taxable income for 2005:this is related informaton given for 2005:income statement:sales 41,100cogs (23,725)GP 17375SG&a (15,492)EBIT 1883TAXES 25%Net income 1412tax issues:al

calculate taxable income for 2005:this is related informaton given for 2005:income statement:sales 41,100cogs (23,725)GP 17375SG&a (15,492)EBIT 1883TAXES 25%Net income 1412tax issues:all 2005 assets purchases were made on 9/27/05no estimated tax payments have been made since inceptionuse section 179 cost recovery for everything other then the building.equipment 25,000 esltimed life 10yrsfurniture 4000 life 8 yrscomputers 6000 life 4yrs

• 11 This data given: GDP=\$110; Income earned by citizens abroad=\$5; income foreigners earn here=\$15; loss from depreciation=\$4; indirect business taxes=\$6; business subsidies=\$2; retained earnings=\$5; corporate income taxes=\$6; social insurance contributions=

This data given: GDP=\$110; Income earned by citizens abroad=\$5; income foreigners earn here=\$15; loss from depreciation=\$4; indirect business taxes=\$6; business subsidies=\$2; retained earnings=\$5; corporate income taxes=\$6; social insurance contributions=\$10; interest paid to households by govt=\$5; transfer payments to households from govt=\$15; personal taxes=\$30; non-tax payments to govt=\$5.??Disposable personal income = ?

• 12 residual

what is residual????how we take residual???xplain with suitable xample