Question

Required information [The following information applies to the questions displayed below.) Pritchard Company reports the below for its beverage and cheese divisions. (Smillions) Invested assets, beginning Invested assets, ending Sales Operating income Beverage Division $2,692 2,608 2,696 Cheese Division $4,485 4.415 3,940 364 Each of the company's divisions has a required rate of return of 5%. For each division, compute residual income. (Enter your answers In millions.) (5 millions) Beverage Cheese Targeted return Target income Residual income Beverage Cheese I Residual income

Answer 1

Beverage Division

Average invested assets = (Beginning invested assets + Ending invested assets)/2

= (2,692 + 2,608)/2

= $2,650 million

Cheese Division

Average invested assets = (Beginning invested assets + Ending invested assets)/2

= (4,485 + 4,415)/2

= $4,450 million

($ millions)	Beverage	Cheese
Average invested assets	$2,650	$4,450
Targeted return	5%	5%
Target income	2,650 x 5% = $132.5	4,450 x 5% = $222.5
Residual income	Beverage	Cheese
Operating income (i)	$364	$649
Target income (ii)	$132.5	$222.5
Residual income (i) - (ii)	$231.5	$426.5

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