Compute the residual income for the Hi Ho investment center as shown below. $\begin{array}{|l|r|}
\hline {\text { Hi Ho Subsidiary }} \
\hline \text { Total sales } & \$ 20,000 \
\text { Operating income } & \$ 4,350 \
\text { Beginning assets invested } & \$ 14,000 \
\text { Ending assets invested } & \$ 16,000 \
\text { Average assets invested } & \$ ? \
\text { Desired ROI } & 25 \% \
\text { Residual income } & \$ ?\\hline
\end{array}$
A) $600
B) $3,100
C) $4,350
D) $1,850

Question

Quizplus · Accepted Answer

The average assets invested is $(\$14,000 + \$16,000) / 2 = \$15,000$. The desired ROI is 25%, so the required return is $25\% \times \$15,000 = \$3,750$. The residual income is the operating income minus the required return: $\$4,350 - \$3,750 = \$600$.

Compute the Residual Income for the Hi Ho Investment Center