Choice "A" is correct. Residual income is the difference between net income and the required return. The required return is net book value (total assets) times the hurdle rate (required rate of return). The calculations are as follows:
Division
| Operating Income
| Total Assets × Required Rate
| = Residual income
|
|---|
A | $500 | $1,000 × .10$100 | $400 |
B | $400 | $1,600 × .10$160 | $240 |
Total | $900 | $260 | $640 |
Choice "b" is incorrect. Residual income would certainly not be $0 in this question because the operating income is greater than the required return for both Division A and Division B.
Choice "d" is incorrect. The $260 is the total required return, not the total residual income.
Choice "c" is incorrect. The $900 is the total operating income, not the total residual income.
