Continental Publishing Company
The Magazine Division of Continental Publishing Company had the following financial data for the year:
$\begin{array}{ll}
\text { Assets available for use } & \$ 1,000,000 \text { Book Value } \
& \$ 1,500,000 \text { Market } V \text { alu } \
\text { Residual income } & \$ 100,000\
\text { Return on innvestment } & 15\%
\end{array}$

Refer to Continental Publishing Company.If expenses increased by $20,000 in the Magazine Division,
A)return on investment would decrease.
B)residual income would increase.
C)the target rate of return would decrease.
D)asset turnover would decrease.

Question

Continental Publishing Company
The Magazine Division of Continental Publishing Company had the following financial data for the year:
$\begin{array}{ll}
\text { Assets available for use } & \$ 1,000,000 \text { Book Value } \
& \$ 1,500,000 \text { Market } V \text { alu } \
\text { Residual income } & \$ 100,000\
\text { Return on innvestment } & 15\%
\end{array}$

Refer to Continental Publishing Company.If expenses increased by $20,000 in the Magazine Division,
A)return on investment would decrease.
B)residual income would increase.
C)the target rate of return would decrease.
D)asset turnover would decrease.

Quizplus · Accepted Answer

If expenses increase by $20,000, the residual income will decrease by $20,000 (since residual income is calculated as net operating income - (cost of capital * assets available for use)), leading to a decrease in return on investment as well. Therefore, choice A is correct.

Choice B is incorrect because the increase in expenses would lead to a decrease in residual income, not an increase.

Choice C is also incorrect because the target rate of return would remain the same, as it is a predetermined percentage set by management.

Choice D is not directly affected by an increase in expenses, as asset turnover is a measure of how efficiently a company uses its assets to generate revenue relative to their book value.

Continental Publishing Company the Magazine Division of Continental Publishing Company

Continental Publishing Company
the Magazine Division of Continental Publishing Company