Herbert Feigl Ltd 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 operating (pre-tax) profit was
A) $192,500
B) $35,000
C) $30,500
D) $16,250

Question

Quizplus · Accepted Answer

Residual income is calculated as Operating Income - (Investment * Required Rate of Return). Given the residual income ($5,000), investment turnover (Sales/Investment = 2.5), and required rate of return (15%), we can find the operating income. First, find the investment: $500,000 / 2.5 = $200,000. Then, calculate the charge for the required return: $200,000 * 15% = $30,000. Finally, add the residual income to the charge for the required return to find the operating income: $30,000 + $5,000 = $35,000.

Herbert Feigl Ltd Had the Following Results During the Most