Residual Income

The operating income and the amount of invested assets in each division of Sadie Industries are as follows:

Operating Income Invested Assets

Retail Division $ 4,000,000 $20,000,000

Commercial Division $ 6,375,000 $ 37,500,000

Internet Division $135,000 $900,000

Assume that management has established a 10% minimum acceptable rate of return for invested assets.

a. Determine the residual income for each division.

Retail Division Commercial Division Internet Division

Operating income $4,000,000 $6,375,000 $135,000

Minimum acceptable

operating income

as a percent of invested

assets $400,000 $637,500 $13,500

Residual income $3,600,000 $5,737,500 $121,500

b. Which division has the most residual income?

Commercial Division