Question

Given the following data: Return on investment 35% Turnover 2.8 Margin 10% Sales $280,000 Average operating assets $80,000 Minimum required rate of return 20% The residual income would be:

Answer 1

Answer:

Residual income = $12000

Explanation:

given data

Return on investment = 35%

Turnover = 2.8

Margin = 10%

Sales = $280,000

Average operating assets = $80,000

Minimum required rate of return =  20%

solution

first we get here total Investment that is

Investment   = Sales  × $\frac{margine}{return}$   ...............1

Investment  = $280,000  × $\frac{10}{35}$

Investment = $80000

and now we get Residual income that is express as

Residual income = Sales  × Margin  - Investment × Minimum required rate of return   ...................2

Residual income = $280,000  × 10%  - $80000  ×20%

Residual income = $12000