King Corp.has revenues of $1,500,000 resulting in an operating income of $105,000.Average invested assets total $750,000,and the hurdle rate is 6%.Calculate the residual income if sales increase by 10% and the profit margin and invested assets remain constant.
A)$115,500
B)$45,000
C)$0
D)$70,500

Question

Quizplus · Accepted Answer

First, we need to find the current return on investment (ROI):
ROI = Operating Income / Average Invested Assets
ROI = $105,000 / $750,000
ROI = 14%

Next, we need to calculate the new operating income assuming a 10% increase in sales:
New Operating Income = $105,000 * 1.1
New Operating Income = $115,500

To calculate the new residual income, we subtract the minimum acceptable rate of return from the new operating income:
Residual Income = New Operating Income - (Average Invested Assets * Hurdle Rate)
Residual Income = $115,500 - ($750,000 * 0.06)
Residual Income = $115,500 - $45,000
Residual Income = $70,500

Therefore, the new residual income is $70,500, which is option D.

King Corphas Revenues of $1,500,000 Resulting in an Operating Income of of $105,000.Average