The Tipton Division of Dudley Company reported the following data last year:

-The division's net operating income last year was:
A) $250,000
B) $125,000
C) $100,000
D) $75,000

Question

The Tipton Division of Dudley Company reported the following data last year:
 
-The division's net operating income last year was:
A) $250,000 
B) $125,000 
C) $100,000 
D) $75,000

Quizplus · Accepted Answer

ROI = Net operating income ÷ Average operating assets
20% = Net operating income ÷ Average operating assets
Average operating assets = Net operating income ÷ 20%
Residual income = Net operating income - (Average operating assets × Minimum required rate of return)
$50,000 = Net operating income - (Average operating assets × 12%)
$50,000 = Net operating income - ((Net operating income ÷ 20%) × 12%)
$50,000 = Net operating income - 0.6 × Net operating income
$50,000 = 0.4 × Net operating income
Net operating income = $50,000 ÷ 0.4 = $125,000

The Tipton Division of Dudley Company Reported the Following Data