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 return on sales was:
A) 6.1%
B) 38.5%
C) 7%
D) 3.25%

Question

Quizplus · Accepted Answer

The return on sales (ROS) is calculated as net income divided by sales. Given the investment turnover is 2.5, we can find the average operating assets by dividing sales ($500,000) by the turnover (2.5), which gives $200,000. With a required rate of return of 15%, the target income is 15% of $200,000, which is $30,000. Since the residual income is $5,000, the actual net income is $30,000 (target income) + $5,000 (residual income) = $35,000. Therefore, the return on sales is $35,000 (net income) / $500,000 (sales) = 7%.

Herbert Feigl Ltd Had the Following Results During the Most