Question

The manager of Synergy Company's Stock Division projects the following for next year: Sales $195,000 Operating income 70,000 Average Operating assets 385,000 The manager can invest in an additional project that would require $50,000 investment in additional assets and would generate $9,000 of additional income. The company's minimum rate of return is 15%. What is the residual income for the Stock Division without the additional investment?

Answer 1

Answer: $12,250

Explanation:

Given Data;

Sales = $195,000

Operating income = $70,000

Average Operating assets = 385,000 Additional investment = $50,000

minimum rate of return is = 15%.

Residual income = operating income - (minimum required return x operating assets).

= $70,000 - ( 0.15 * 385,000)

= $12,250

Residual income without the Added investments is $12,250