Guardian Corporation has two major divisions-Healthcare Products and Pharmaceutical Products. It provides the following information for the year Pharmaceutical Division Healthcare Division $150,000 $47.000 $310,000 $1,000,000 $218,400 $5,660,000 13 0% sales ating income age assets Target rate of return 13 0% Calculate the residual income for the Healthcare Division. a. $47 000
b. $6700
c. $27.500
d. $103,000

Residual income =$6,700

Explanation:

Residual income is the excess of the controllable profit over the opportunity cost of capital invested.

It is used to evaluate the financial performance of a division or department.

The a positive residual value indicate a good performance, hence the higher the residual  value the better

It is computed as follows:

Residual income = Controllable profit - (cost of capital× operating assets)

Controllable  profit = 47,000  

Interest on capital = ×  13% × 310,000 = 40300

Residual income = 47,000 - 40,300 =  6700

Residual income =$6,700

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