A segment with an ROI of 30% has a profit of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:
A) $25,200
B) $26,712
C) $50,400
D) $33,600

Question

Quizplus · Accepted Answer

Residual income is calculated as the actual profit minus the product of the required rate of return and the investment. Given an ROI of 30% and a profit of $84,000, we can find the investment by rearranging the ROI formula: ROI = Profit / Investment. Thus, Investment = Profit / ROI = $84,000 / 0.30 = $280,000. The residual income is then calculated as $84,000 - ($280,000 * 0.18) = $84,000 - $50,400 = $33,600.

A Segment with an ROI of 30% Has a Profit