Use the following information for the next 4 questions.
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 operating (pretax) income was
A) $30,500
B) $192,500
C) $35,000
D) $16,250

Question

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of the required rate of return and the investment. Given residual income is $5,000, and the required rate of return is 15%, we can find the investment by dividing sales by investment turnover (i.e., $500,000 / 2.5 = $200,000). The required return is 15% of $200,000, which is $30,000. Therefore, operating income is $30,000 + $5,000 = $35,000.

Use the Following Information for the Next 4 Questions