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Division A is an investment centre with assets of $7.3 million. The following is an extract from the annual budget for division A:
The cost of capital is 14%.
Calculate the residual income for division A.
Suggested Answer: A, C, D
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39 comments · newest first
MA
Marylyn
11 months ago
Totally agree, the net income info is missing!
SK
Skye
11 months ago
Wait, how do we even know the net income here?
RO
Royal
12 months ago
Residual income is calculated by subtracting the cost of capital from net income.
EL
Eliz
12 months ago
I think the cost of capital is too high at 14%.
DI
Diane
12 months ago
Division A has $7.3 million in assets.
CL
Claudia
1 year ago
I think the answer might be $808,000, but I need to double-check my calculations for the net income and the capital charge.
LI
Ligia
1 year ago
I feel a bit confused about how to calculate the required return. Is it just the cost of capital times the assets?
SE
Serita
1 year ago
This question seems similar to one we practiced where we had to subtract the cost of capital from net income. I think I can apply that here.
BR
Brittani
1 year ago
I remember we calculated residual income in class, but I'm not sure if I got the formula right.
IO
Iola
1 year ago
This looks straightforward enough. I'll just plug the numbers into the residual income formula and see what I get. As long as I don't make any silly mistakes in the calculations, I should be able to arrive at the correct answer.
VA
Valene
1 year ago
Okay, I think I've got this. The key is to calculate the expected return on the assets, which is 14% of $7.3 million, and then subtract that from the budgeted operating profit of $2,008,000. That should give me the residual income.
KA
Kaitlyn
1 year ago
Hmm, I'm a bit unsure about this one. I know residual income has something to do with the difference between actual and expected profits, but I'm not totally clear on the exact formula. I'll have to review my notes before attempting this.
LO
Louvenia
1 year ago
This looks like a straightforward residual income calculation. I'll start by finding the expected return on the $7.3 million in assets at the 14% cost of capital, then subtract that from the budgeted operating profit to get the residual income.
JU
Julene
1 year ago
I've done this type of setup before, so I'm feeling confident. The two main steps are definitely creating the SnapMirror relationships and the SVM-DR relationship. The cluster peering is just a prerequisite for the SVM-DR, so that's an implied step.
VA
Vanesa
1 year ago
Hmm, this seems like a tricky one. I'll need to think through the different options carefully.
ST
Stevie
1 year ago
I think the key here is to look for the option that provides the strongest internal control. Having the payroll bank account reconciled in the payroll department doesn't seem like a strong enough control, since that department is responsible for the payroll process. Placing the payroll checks under the personal control of the payroll manager also doesn't seem like a good idea, as that could lead to potential misuse. I'm leaning towards option D - having a person other than the one who requested and authorized the payments prepare the payroll checks. That seems like the best way to maintain proper segregation of duties.
MA
Margarett
1 year ago
This question is like a riddle wrapped in an enigma, wrapped in a tortilla. But hey, at least it's not a calculus problem, right? I'm just gonna go with C and hope for the best.
AL
Alishia
1 year ago
I'm going with D, it just feels right to me.
LI
Lizbeth
1 year ago
I'm leaning towards A, but I'm not entirely sure.
TW
Twana
1 year ago
I think I'll go with B, it seems like the most reasonable choice.
RO
Rory
2 years ago
Wait, wait, wait. How do we know the target profit is $1,022,000? Is that just some magic number, or is there a formula we're supposed to use? I'm feeling a bit lost here.
DE
Deangelo
1 year ago
Exactly! You're on the right track. Good job!
AL
Alesia
1 year ago
Got it, thanks for explaining. So, the answer would be A) $808,000 then.
DE
Delsie
1 year ago
So, we use the formula: Residual Income = Net Operating Income - (Assets x Cost of Capital). That's how we get the target profit.
RI
Ria
1 year ago
Don't worry, the target profit is usually set by management based on various factors. It's not a magic number.
EL
Elbert
2 years ago
Aha! I've got it. The target profit is $1,022,000, and the actual profit is $664,000. So the residual income is the difference, which is $358,000. Easy peasy, lemon squeezy!
HE
Helene
1 year ago
Nice job! You nailed it with the calculation.
CA
Catarina
1 year ago
That's correct! The residual income for division A is $358,000.
TA
Tamie
1 year ago
User 2
BO
Boris
1 year ago
User 1
UL
Ula
2 years ago
Hmm, I'm not sure about this one. The cost of capital is 14%, but the actual profit is only $664,000. That seems a bit low. Maybe I should double-check my calculations.
BU
Buck
2 years ago
Okay, let's think this through step-by-step. The asset value is $7.3 million, and the cost of capital is 14%. Plugging that into the formula, I get $1,022,000 as the target profit. Subtracting the actual profit of $664,000, the residual income is $358,000. So the correct answer is C.
TI
Tiera
1 year ago
Oh, I see where I went wrong now. Thanks for pointing that out!
AM
Amina
1 year ago
Yes, I'm sure. The correct answer is definitely A) $808,000.
WI
Willodean
1 year ago
Are you sure about that? I'm pretty confident in my calculation.
MI
Micaela
1 year ago
I think you made a mistake in your calculation. The residual income should be $808,000, not $358,000.
VI
Vincenza
2 years ago
But the cost of capital is 14%, so I think the correct answer is C) $358,000.
JO
Jonelle
2 years ago
I disagree, I believe the answer is D) $2,008,000.
VI
Vincenza
2 years ago
I think the answer is B) $1,727,800.