Pine Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000.Residual income is $18,000.Calculate the new residual income if sales increase by 10% and the profit margin and invested assets remain the same.
A)$23,400
B)$0
C)$3,240
D)$36,000

Question

Quizplus · Accepted Answer

With a 10% increase in sales, revenues become $550,000. The profit margin (operating income/revenues) remains the same, so the new operating income is 10.8% of $550,000 = $59,400. Residual income is calculated as operating income minus a charge on invested assets. Since invested assets remain the same at $600,000 and assuming the same charge rate, the increase in operating income directly translates to an increase in residual income. The new residual income is the original $18,000 plus the increase in operating income ($59,400 - $54,000 = $5,400), totaling $23,400.

Pine Corphas Revenues of $500,000 Resulting in an Operating Income of of $54,000.Invested