Reef Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000,and the cost of capital is 6%.Calculate the increase in residual income if sales increase by 10% and the profit margin and invested assets remain the same.
A)$5,400
B)$24,000
C)$0
D)$7,500

Question

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of invested assets and the cost of capital. With a 10% increase in sales, revenues become $550,000, and operating income increases by 10% to $59,400. The cost of capital remains the same, so the increase in residual income is $59,400 - $54,000 = $5,400.

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