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University Hospital provided the following segment margin income statements for two of its ...

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University Hospital provided the following segment margin income statements for two of its ...

University Hospital provided the following segment margin income statements for two of its divisions: Diagnostic and Outpatient. Both divisions are structured as investment centers.

Diagnostic

Outpatient

Total

Revenue	$500,000	$400,000	$900,000
Variable expenses
Product	220,000	140,000	360,000
Selling and administrative	150,000	80,000	230,000
Contribution margin	130,000	180,000	310,000
Less traceable fixed costs	82,000	93,000	175,000
Segment margin	$ 48,000	$ 87,000	135,000
Common fixed costs			130,000
Net operating income			$ 5,000

The average assets for the Diagnostic and Outpatient divisions total $400,000 and $600,000, respectively. The required minimum rate of return for both divisions is 10%.

Required:

a.	Calculate the current residual income for each division.

b.	Why is residual income a better measure of performance for managers of investment

centers than the overall profit compared to the flexible budget?

Textbook

Managerial Accounting

Edition: 4^th

Author: Davis

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