Coral has a profit margin of 16% based on revenues of $400,000,and investment turnover is 2.What is the residual income when the cost of capital is 10%?
A)$44,000
B)$20,000
C)$40,000
D)$64,000

Question

Quizplus · Accepted Answer

Residual income is calculated as net operating income minus the product of the cost of capital percentage and the capital invested. First, calculate the net operating income (profit) by applying the profit margin to the revenues: $400,000 * 16% = $64,000. Then, calculate the capital invested by dividing the revenues by the investment turnover: $400,000 / 2 = $200,000. Finally, calculate the residual income: $64,000 - ($200,000 * 10%) = $64,000 - $20,000 = $44,000.

Coral Has a Profit Margin of 16% Based on Revenues