Asked by Erica Doherty on Jul 07, 2024
Verified
How much is the residual income?
A) $80,000.
B) $100,000.
C) $40,000.
D) $420,000.
Residual Income
A profitability measure that subtracts an opportunity cost for capital from the profits generated.
Minimum Required Return
The minimum required return is the lowest acceptable profit or gain on an investment, factoring in the risk and opportunity cost.
Operating Income
Income generated from regular business operations, excluding costs of goods sold and other operating expenses.
- Familiarize oneself with the idea of residual income and its formula for calculation.
Verified Answer
BR
Barri’ Ragland-EnglishJul 13, 2024
Final Answer :
C
Explanation :
Residual income is calculated as Net Operating Income - (Average Operating Assets * Minimum Required Return). Here, it's $80,000 - ($200,000 * 20%) = $80,000 - $40,000 = $40,000.
Learning Objectives
- Familiarize oneself with the idea of residual income and its formula for calculation.