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 with the additional project?
A) $4,200
B) $6,000
C) $6,600
D) $27,600

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 with the additional project?
A) $4,200
B) $6,000
C) $6,600
D) $27,600

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of the minimum rate of return and operating assets. With the additional project, the total operating income becomes $34,200 ($30,000 + $4,200), and the total operating assets become $230,000 ($200,000 + $30,000). The minimum required return is 12% of $230,000, which is $27,600. Therefore, the residual income is $34,200 - $27,600 = $6,600.