Operations Management

Question 1

How is residual income calculated?

Answer 1

Residual income is income of an investment center minus an imputed interest charge for invested capital. Accordingly, Vale’s residual income is $144,000 [($500,000 sales − $300,000 VC − $50,000 traceable FC) net income − (6% × $100,000 average invested capital) imputed interest].

Question 2

How is ROI calculated?

Answer 2

ROI equals net income divided by average invested capital. Consequently, ROI equals 27.5% [($311,000 sales − $250,000 VC − $50,000 FC) / $40,000 average invested capital].