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?
Laboratory, Institute of Biochemistry, University of Cologne.
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