The Pasta Division of Whole Grain Corporation had sales of $5,500,000 and operating income of $1,375,000 last year.The total assets of the Pasta Division were $2,750,000,while current liabilities were $330,000.Whole Grain Corporation's target rate of return is 12%,while its weighted average cost of capital is 8%.The effective tax rate for the company is 30%.
What is the Pasta Division's Residual Income (RI)?

Question

Quizplus · Accepted Answer

A)
Residual income = Operating income - (Target rate of return × Total assets)
= 1,375,000 - (12% × 2,750,000)
= 1,375,000 - 330,000 = 1,045,000

The Pasta Division of Whole Grain Corporation Had Sales of $5,500,000