g here are three divisions in Company Z. Here are their operating results: Division A Division B Division C Operating Income $12,000 $10,000 $16,000 Average Operating Assets (invested capital) $42,000 $45,000 $80,000 Sales $120,000 $100,000 $160,000 Cost of Capital is 12% for this company (this is the cost of their money, the debt and equity they need to finance their business). Which division of company Z is the top performer?

Question

Ethen Clay

Business

5 September, 00:37

g here are three divisions in Company Z. Here are their operating results: Division A Division B Division C Operating Income $12,000 $10,000 $16,000 Average Operating Assets (invested capital) $42,000 $45,000 $80,000 Sales $120,000 $100,000 $160,000 Cost of Capital is 12% for this company (this is the cost of their money, the debt and equity they need to finance their business). Which division of company Z is the top performer?

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Carley · Answer 1

Division A has the residual income of $6,960. Hence, it is the top performer

Explanation:

Using the residual income performance metric, the division with the highest residual would be considered the top performer.

Residual income = Net operating income - (cost of capital * Operating assets)

Division A = 12,000 - (12% * 42,000) = 6960

Division B = 10,000 - (12% * 45,000) = 4600

Division C = 16,000 - (12% * 80,000) = 6400

Division A has the residual income of $6,960. Hence, it is the top performer