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Chocolate Enterprise is a multi-division company. The current ROI for Chocolate Enterprise as a whole is 11%, and Chocolate Enterprise has a minimum required rate of return on all investments of 10%. The most successful division within Chocolate Enterprise is the Boxed Candy division. Currently the boxed candy division has total assets of $2,000,000 with operating income of $400,000. The manger of the Boxed Candy division is considering the purchase of a small company called Truffles Inc. The purchase of Truffles Inc. will require an investment of $800,000 and with the synergy between the two companies will increase the Boxed Candy Division operating income by $76,000. Bonuses in all the Chocolate Enterprise Divisions are awarded to mangers with increasing ROI's.
-The Residual Income for the Boxed Candy Division, after the purchase of Truffles Inc. would be:
A) $196,000
B) $200,000
C) $224,000
D) $504,000

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Quizplus · Accepted Answer

Residual Income is calculated as Operating Income minus the product of the Minimum Required Rate of Return and Total Assets. After the purchase, the Boxed Candy Division's operating income will be $476,000 ($400,000 + $76,000), and total assets will be $2,800,000 ($2,000,000 + $800,000). The Residual Income is $476,000 - (10% of $2,800,000) = $476,000 - $280,000 = $196,000.

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