Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on sales was:
A)7%
B)6)1%
C)38.5%
D)3)25%

Question

Quizplus · Accepted Answer

Return on sales can be calculated as Residual income/Sales. 
Residual income = Operating income - (Assets x Required rate of return)
Given Residual income = $5,000 and Required rate of return = 15%
Assets = Residual income/Required rate of return = $5,000/0.15 = $33,333.33
Investment turnover = Sales/Assets = 2.5
Therefore, Sales = Investment turnover x Assets = $83,333.33
Return on sales = Residual income/Sales = $5,000/$500,000 = 0.01 = 1%
Hence, the correct answer is 7% which is not among the given choices. However, if we assume that the residual income is given as a percentage of assets, then the answer would be 1.5%.