Calculating Residual Income

Forchen, Inc., provided the following information for two of its divisions for last year:

	Small Appliances Division	Cleaning Products Division
Sales	$34,650,000	$31,370,000
Operating income	2,587,400	1,252,900
Operating assets, January 1	6,394,000	5,600,000
Operating assets, December 31	7,470,000	6,720,000

Forchen, Inc., requires an 8 percent minimum rate of return.

Required:

1. Calculate residual income for the Small Appliances Division.

$

2. Calculate residual income for the Cleaning Products Division.

$

3. What if the minimum required rate of return was 9 percent? How would that affect the residual income of the two divisions?

Small Appliances Division residual income would be	higher. lower. unaffected.
Cleaning Products Division residual income would be	higher. lower. unaffected.