The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. Which of the following statements is incorrect?
A) The impact of the investment on Mullen's capital turnover can't be determined given the information provided.
B) Mullen's residual income will increase if the investment in the project is made.
C) Mullen's return on investment will increase if the investment in the project is made.
D) Mullen's residual income will increase because the project's return on investment exceeds the minimum acceptable rate of return.

Question

Quizplus · Accepted Answer

DExplanation:- The return on investment (ROI) for the new project is calculated as the operating income generated by the project divided by the cost of the project, which is $7,200 / $60,000 = 12%. Mullen's current ROI is $90,000 / $600,000 = 15%. Adding a project with a lower ROI than the current ROI will actually decrease the overall ROI, making statement C incorrect.- Residual income is calculated as operating income minus a charge for the capital used, based on the minimum acceptable rate of return. For the new project, the charge for capital is $60,000 * 10% = $6,000. The project's operating income is $7,200, so the residual income from the project is $7,200 - $6,000 = $1,200. This means the overall residual income for Mullen will increase with the project, making statement D incorrect because it is presented as a correct statement, implying the question asked for incorrect statements.

The Management of Mullen Division Has Provided the Following Information