Asked by Emilija Dancetovic on Jun 21, 2024
Verified
If the Axle Division sells 15,000 units per year, the residual income should be
A) $100,000.
B) $50,000.
C) $10,000.
D) $30,000.
Unit Selling Price
The price at which a single unit of a product is sold to customers.
Unit Variable Cost
The cost that varies with each unit produced, including materials, labor, and other expenses directly tied to production volume.
Minimum Required Rate Of Return
This is the lowest acceptable return on an investment, determined by the investor's risk tolerance, inflation expectations, and the opportunity cost of capital.
- Analyze financial data to compute the return on investment (ROI), residual income, and margin.
- Understand the importance of the minimum required rate of return in financial decision-making.
Verified Answer
MH
Muadh HussainJun 23, 2024
Final Answer :
C
Explanation :
Residual income is calculated as: Operating Income - (Average Operating Assets * Minimum Required Rate of Return). Operating income is (Unit Selling Price - Unit Variable Cost) * Units Sold - Total Fixed Costs = ($50 - $30) * 15,000 - $200,000 = $300,000 - $200,000 = $100,000. The minimum required return on average operating assets is $750,000 * 12% = $90,000. Therefore, residual income is $100,000 - $90,000 = $10,000.
Learning Objectives
- Analyze financial data to compute the return on investment (ROI), residual income, and margin.
- Understand the importance of the minimum required rate of return in financial decision-making.