Asked by Marina Castelluzzo on Jun 09, 2024
Verified
If divisional operating income is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000.
Residual Income
Income that remains after all operating expenses and costs of capital have been subtracted from revenues.
Minimum Return
The lowest acceptable rate of return on an investment, often used to guide financial decisions and risk management strategies.
- Comprehend the benefits of leveraging return on investment (ROI) and residual income for evaluating performance metrics.
- Familiarize yourself with the formulas and results of profit margin, investment turnover, and residual income determinations.
Verified Answer
DC
David ChangJun 15, 2024
Final Answer :
False
Explanation :
The residual income is calculated as the divisional operating income minus the product of the minimum required return rate and the invested assets. So, it would be $100,000 - ($850,000 * 8%) = $100,000 - $68,000 = $32,000.
Learning Objectives
- Comprehend the benefits of leveraging return on investment (ROI) and residual income for evaluating performance metrics.
- Familiarize yourself with the formulas and results of profit margin, investment turnover, and residual income determinations.
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