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%. How much is Mullen's overall residual income if the investment is made?
A) $31,200
B) $1,200
C) $61,200.
D) $47,200

Question

Quizplus · Accepted Answer

Residual income = Operating income - (Minimum acceptable rate of return * Total assets)= $90,000 - (0.10 * $600,000)= $90,000 - $60,000= $30,000After investment:Residual income = ($90,000 + $7,200) - (0.10 * $660,000)= $97,200 - $66,000= $31,200

The Management of Mullen Division Has Provided the Following Information