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

Question

Quizplus · Accepted Answer

Return on sales is calculated as net income divided by sales. First, calculate net income using residual income and required rate of return: Residual Income = Net Income - (Investment * Required Rate of Return). Investment can be found using Investment Turnover = Sales / Investment, which gives Investment = $500,000 / 2.5 = $200,000. Then, $5,000 = Net Income - ($200,000 * 0.15), so Net Income = $35,000. Return on Sales = $35,000 / $500,000 = 7%.

Use the Following Information for the Next 4 Questions