Gamma Division
The manager of Gamma Division projects the following for next year: $$\begin{array} { l l }
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$$ The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
-Refer to Gamma Division. What is the residual income without the additional investment?
A) $4,200
B) $6,000
C) $6,600
D) $24,000

Question

Gamma Division
The manager of Gamma Division projects the following for next year: $$\begin{array} { l l } 
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$$ The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
-Refer to Gamma Division. What is the residual income without the additional investment?
A) $4,200
B) $6,000
C) $6,600
D) $24,000

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of operating assets and the minimum rate of return. Without the additional investment, it is $30,000 - (12% of $200,000) = $30,000 - $24,000 = $6,000.