Required information Use the following information for the Exercises below. [The following information applies to the questions displayed below.]

A food manufacturer reports the following for two of its divisions for a recent year.

($millions) Beverage Division Cheese Division
Invested assets, beginning $ 2,500 $ 4,700
Invested assets, ending 2,400 4,600
Sales 2,684 3,928
Operating income 352 637

Assume that each of the company’s divisions has a required rate of return of 6.00%. Compute residual income for each division. (Enter your answers in millions.)

Computation of residual income

                                      Beverage Division                 Cheese Division

                                              $'million                                  $'million

Operating Income                352                                           637

Imputed Cost                         (147)                                          (257)

Residual Income                   205                                          358

Explanation:

step 1 : determine the average invested asset of bboth dividion

beverage division = ( 2500+2400)/2 = 2450

Cheese dividion = (4700 + 4600)/2  =  4650

step 2 : multiply the average invested asset calculated above by the required rate of return of the company to get imputed cost

Beverage Division=  6.00%* 2450 = 147

Cheese division = 6.00% * 4650 = 275

step 3 : deduct the result in step 2 from the operating cost in order to determine the residual income of each dividion.

BEVERAGE DECISION ($million) 205

CHEESE DECISION ($million) 358

Step by Step Explanation:

($millions) Beverage Division, Cheese Division

Average assets 2,440 4,650

Targeted return 6% 6%

Target income 147 279

Residual income

Operating income 353 637

Less target income (147) (279)

Residual Income 205, 358

Therefore the residual income for each division is:

BEVERAGE DECISION ($million) 205

CHEESE DECISION ($million) 358

Average asset

Beverage Decision

2,500+2400/2

4,900/2

=2,450

Cheese Decision

4,700+4,600/2

9,300/2

=4,650

Target income

Beverage Decision

6%×2,450=147

Cheese Decision

6%×4,650=279

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