15 HOMEWORK Saved Help Save Exit Submit 4 Check my work 6 E

15 HOMEWORK Saved Help Save & Exit Submit 4 Check my work 6 Exercise 15-15 Residual income LO 15-7 Adams Cough Drops operates two divisions. The following information pertains to each division for 2018 nts Division A Division B Sales operating income Average operating assets Company s desired rate of return $213,eee $15,200 61,eee38e $9e,eee 8,8?? eBook 14% 14% Hint Print Required eferences a. Compute each division\'s residual income b. Which division increased the company\'s profitability more? Residual Income a. Division A Division EB b. The division that increased the company\'s profitability more is Mc K Prev6 of 6Next

Solution

Requirement (a) – Residual Income of Division A and Division B

Residual Income = Net Operating Income – [Average Operating Assets x Desired rate of return]

DIVISION - A

= $15,200 – [$61,000 x 14%]

= $15,200 – 8,540

= $ 6,660

DIVISION - B

= $8,800 – [$38,000 x 14%]

= $8,800 – 5,320

= $3,480

Requirement (b)

The Division that increased the company’s profitability more is “DIVISION – A”