The West Division of Cecchetti Corporation had average operating assets of $240,000 and net operating income of $42,200 in August. The minimum required rate of return for performance evaluation purposes is 19%.What was the West Division's residual income in August?
A) $(8,018)
B) $3,400
C) $(3,400)
D) $8,018

Question

Quizplus · Accepted Answer

Residual income is calculated by deducting a minimum required rate of return from the net operating income. In this case, the residual income would be:

$42,200 - (0.19 x $240,000) = -$3,400

The negative result indicates that the West Division did not generate enough income to meet the minimum required rate of return. Therefore, the correct choice is C, which represents the negative residual income of -$3,400.

The West Division of Cecchetti Corporation Had Average Operating Assets