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


​​DiagnosticOutpatientTotal
Revenue$500,000$400,000$900,000
Variable expenses​​​
  Product220,000 140,000360,000
  Selling and administrative  150,000   80,000 230,000
Contribution margin130,000 180,000310,000
Less traceable fixed costs   82,000   93,000  175,000
Segment margin$  48,000$  87,000135,000
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

Managerial Accounting


Edition: 4th
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relisabethrelisabeth
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A month ago
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a.Residual income calculations:
Diagnostic$48,000 - ($400,000 × 10%) = $8,000
Outpatient$87,000 - ($600,000 × 10%) = $27,000

b.Residual income is a better performance measure for investment center managers
because it considers both the unit's income and its level of assets. Evaluating on a flexible budget considers only on revenues and expenses, taking away the incentive of generating a return on assets.
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aznmistyblue Author
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A month ago
Thanks
Marctheshark
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Yesterday
Good timing, thanks!
halyna
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2 hours ago
Thanks
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