Sousa Corporation provides the following financial information: $$\begin{array} { | l | r | }
\hline \text { Minimum acceptable operating income } & \$ 556,600 \
\hline \text { Average total assets } & \$ 2,600,000 \
\hline \text { Operating income } & \$ 708,000 \
\hline \text { Return on investment } & 27 \% \
\hline \text { Net sales } & \$ 900,000 \
\hline
\end{array}$$ Calculate the residual income of Sousa Corporation.
A) $2,043,400
B) $343,400
C) $151,400
D) $412,274

Question

Sousa Corporation provides the following financial information: $$\begin{array} { | l | r | } 
\hline \text { Minimum acceptable operating income } & \$ 556,600 \
\hline \text { Average total assets } & \$ 2,600,000 \
\hline \text { Operating income } & \$ 708,000 \
\hline \text { Return on investment } & 27 \% \
\hline \text { Net sales } & \$ 900,000 \
\hline
\end{array}$$ Calculate the residual income of Sousa Corporation.
A) $2,043,400
B) $343,400
C) $151,400
D) $412,274

Quizplus · Accepted Answer

Residual income is calculated as the actual operating income minus the product of the minimum required rate of return (in this case, the return on investment or ROI) and the average total assets. Given the operating income of $708,000, a return on investment (ROI) of 27%, and average total assets of $2,600,000, the minimum acceptable operating income can be calculated as 27% of $2,600,000, which is $702,000. Therefore, the residual income is $708,000 (actual operating income) - $702,000 (minimum acceptable operating income based on ROI) = $6,000. However, since none of the provided options match this calculation and the given minimum acceptable operating income is $556,600, we use the provided figures directly for calculation: $708,000 (actual operating income) - $556,600 (given minimum acceptable operating income) = $151,400. This discrepancy suggests a misunderstanding in the calculation process based on the provided options, but based on the standard formula and the given options, $151,400 (option C) is selected as the correct answer.

Sousa Corporation Provides the Following Financial Information Calculate the Residual Income of Sousa Corporation