Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}
\text { Sales } & \$ 825,000 \
\text { Average investment } & \$ 440,000 \
\text { Net operating income } & \$ 66,000 \
\text { Minimum rate of return (divisional cost of capital) } & 14 \%
\end{array}$If the minimum rate of return (i.e., cost of capital) was 13%, Chering Division's residual income (RI) would calculate to be:
A)$4,400.
B)$8,800.
C)$9,240.
D)$22,380.
E)$49,500.

Question

Selected data from Chering Division's accounting records revealed the following:
$\begin{array}{lcc}
\text { Sales } & \$ 825,000 \
\text { Average investment } & \$ 440,000 \
\text { Net operating income } & \$  66,000 \
\text { Minimum rate of return (divisional cost of capital) } & 14 \%
\end{array}$If the minimum rate of return (i.e., cost of capital) was 13%, Chering Division's residual income (RI) would calculate to be:
A)$4,400.
B)$8,800.
C)$9,240.
D)$22,380.
E)$49,500.

Quizplus · Accepted Answer

Residual income is calculated as Net Operating Income - (Average Investment * Minimum Rate of Return). With a 13% rate, RI = $66,000 - ($440,000 * 0.13) = $8,800.

Selected Data from Chering Division's Accounting Records Revealed the Following