Reardon Enterprises has operating income of $90,000. Its return on investment (ROI)is 40%, while its target rate of return is 15%. The total assets of Reardon Enterprises would be closest to
A)$36,000.
B)$621,429.
C)$225,000.
D)$90,000.

Question

Quizplus · Accepted Answer

ROI = Operating income / Total assets
0.40 = 90,000 / Total assets
Total assets = 225,000
Since the target rate of return is 15%, we can use the formula:
Target net profit = Total assets * Target rate of return
Target net profit = 225,000 * 0.15 = 33,750
Actual net profit = Operating income = 90,000
Excess net profit = Actual net profit - Target net profit
Excess net profit = 90,000 - 33,750 = 56,250
To compute the residual income (RI), we subtract the target net profit from the actual net profit:
RI = Actual net profit - (Total assets * Target rate of return)
RI = 90,000 - 33,750 = 56,250
Therefore, the best answer is C, with a total assets of $225,000.

Reardon Enterprises Has Operating Income of $90,000