Mario’s Bikes requires a return of 7% from each of its divisions. The E Bike division is currently experiencing a boom in sales and the Manager of this division will receive a bonus if the division’s residual income is greater than the required return. E Bikes investment of 8203043 has generated sales of $1246899 and a divisional profit of $687563 for 2024. Based on this their residual income is

Question

BlackTom AI · Accepted Answer

We start by clearly restating what residual income (RI) means in this context. RI = Net Operating Profit After Taxes (NOPAT) minus the required return on invested capital. Here, the division’s profit is given as 687,563, and the invested capital (the base for the required return) is 8,203,043. The required return is 7% of the invested capital.

Step 1: Compute the required return. 7% of 8,203,043 = 8,203,043 × 0.07 = 574,213.01.

Step 2: Subtract the required return from the division’s profit to obtain residual income. RI = 687,563 − 574,213.01 = 113,349.99.

Step 3: Interpret the result. A positive residual income (113,349.99) indicates the division is earning more than the minimum return required by the company’s policy; a negative RI would suggest the opposite. The magnitude represents how much above the required return the division’s profit sits.

Note: If you compare with alternate figures or rounding, small differences can arise from rounding intermediate steps. For instance, using 574,212.99 or 574,213.00 as the rounded required return would yield RI values very close to 113,350.00, differing only by a few cents due to rounding conventions.

Summary of the calculation steps:
- Determine required return: invested capital × 0.07
- Subtract from divisional profit to obtain RI
- Interpret sign and magnitude of RI accordingly

MCD2150 - T2 - 2025 Week 8 Workshop 2 Quiz

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