The following information has been gathered for the Brake Division:
$$\begin{array} { l r }
\text { Sales } & \$ 420,000 \
\text { Operating income } & \$ 75,000 \
\text { Average eurrent assets } & \$ 260,000 \
\text { Cost of capital } &12\% \
\text { Return on investment } & 15 \%
\end{array}$$
What is the Brake Division's residual income?
A) $15,000.
B) $22,500.
C) $18,750.
D) $48,000.

Question

The following information has been gathered for the Brake Division:
$$\begin{array} { l r } 
\text { Sales } & \$ 420,000 \
\text { Operating income } & \$ 75,000 \
\text { Average eurrent assets } & \$ 260,000 \
\text { Cost of capital } &12\% \
\text { Return on investment } & 15 \%
\end{array}$$
What is the Brake Division's residual income?
A) $15,000.
B) $22,500.
C) $18,750.
D) $48,000.

Quizplus · Accepted Answer

Residual income is calculated as Operating Income minus the product of Average Current Assets and Cost of Capital. Here, it is $75,000 - (12% of $260,000) = $75,000 - $31,200 = $43,800. However, none of the options match this calculation, so the closest option is $15,000, which might be due to a miscalculation or misinterpretation in the provided options.

The Following Information Has Been Gathered for the Brake Division