Question

The Nashville Division of Country Classics currently reports a profit of $3.6 million. Divisional invested capital totals $9.5 million; the imputed interest rate is 12%. On the basis of this information, Nashville’s residual income is:

Answer 1

Answer:

Nashville's  residual income = Net profit - Imputed cost of capital

                                               = $3,600,000 - 12% x $9,500,000

                                               = $3,600,000 - $1,140,000

                                               = $2,460,000

Explanation:

Residual income is equal to net income minus imputed cost of capital. Imputed cost of capital is the product of interest rate and capital invested.