Reef Corp.has revenues of $500,000 resulting in an operating income of $54,000.Invested assets total $600,000,the cost of capital is 6%.Calculate the increase in residual income if sales increase by 10% and the profit margin and invested assets remain the same.
A)$5,400
B)$24,000
C)$0
D)$7,500

Question

Quizplus · Accepted Answer

The correct answer is A.The increase in residual income is calculated as follows:Increase in sales = 10% * $500,000 = $50,000New sales = $500,000 + $50,000 = $550,000New operating income = $550,000 * 10.8% = $59,400New invested assets = $600,000New residual income = $59,400 - $600,000 * 6% = $24,000Increase in residual income = $24,000 - $54,000 = $5,400

Reef Corphas Revenues of $500,000 Resulting in an Operating Income of of $54,000.Invested