Calculating Residual IncomeForchen, Inc., provided the following information for two of its divisions for last year: Small AppliancesDivisionCleaning ProductsDivisionSales $34,670,000$31,320,000Operating income2,773,6001,252,800Operating assets, January 16,394,0005,600,000Operating assets, December 317,474,0006,000,000Forchen, Inc., requires an 8 percent minimum rate of return.Required:1. Calculate residual income for the Small Appliances Division.$ fill in the blank 12. Calculate residual income for the Cleaning Products Divi$ fill in the blank 2

The objective of the question is to calculate the residual income for the Small Appliances Division and the Cleaning Products Division of Forchen, Inc. Residual income is a measure of the profitability of different business units within a company. It is calculated as the operating income of a division minus the product of the minimum required rate of return and the average operating assets of the division.First, we need to calculate the average operating assets for each division. The average operating assets is the average of the operating assets at the beginning and end of the year. For the Small Appliances Division, the average operating assets is ($6,394,000 + $7,474,000) / 2 = $6,934,000. For the Cleaning Products Division, the average operating assets is ($5,600,000 + $6,000,000) / 2 = $5,800,000.Next, we calculate the minimum required return for each division. This is done by multiplying the average operating assets by the minimum required rate of return. For the Small Appliances Division, the minimum required return is $6,934,000 * 8% = $554,720. For the Cleaning Products Division, the minimum required return is $5,800,000 * 8% = $464,000.Finally, we calculate the residual income for each division. The residual income is the operating income minus the minimum required return. For the Small Appliances Division, the residual income is $2,773,600 - $554,720 = $2,218,880. For the Cleaning Products Division, the residual income is $1,252,800 - $464,000 = $788,800.The residual income for the Small Appliances Division of Forchen, Inc. is $2,218,880 and for the Cleaning Products Division is $788,800. These figures represent the profitability of each division after accounting for the minimum required rate of return on their operating assets.

Answered: Calculating Residual Income Forchen,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Recommended textbooks for you

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

Horngren's Cost Accounting: A Managerial Emphasis…

Accounting

ISBN:

9780134475585

Author:

Srikant M. Datar, Madhav V. Rajan

Publisher:

PEARSON

Intermediate Accounting

Accounting

ISBN:

9781259722660

Author:

J. David Spiceland, Mark W. Nelson, Wayne M Thomas

Publisher:

McGraw-Hill Education

Financial and Managerial Accounting

Accounting

ISBN:

9781259726705

Author:

John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS

	Small Appliances Division	Cleaning Products Division
Sales	$34,670,000	$31,320,000
Operating income	2,773,600	1,252,800
Operating assets, January 1	6,394,000	5,600,000
Operating assets, December 31	7,474,000	6,000,000