Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax)income was:
A)$30,500
B)$192,500
C)$35,000
D)$16,250

Question

Quizplus · Accepted Answer

Residual Income = Operating Income - (Required Rate of Return * Total Investment)
Residual Income = $5,000
Required Rate of Return = 15%
Total Investment = Sales / Investment Turnover
Total Investment = $500,000 / 2.5
Total Investment = $200,000

$5,000 = Operating Income - (0.15 * $200,000)
$5,000 = Operating Income - $30,000
Operating Income = $35,000

Therefore, the operating income was $35,000.