ABC Inc.has the following information available for one of its divisions:
$\begin{array}{lr}
\text { Average operating assets} &\$5000000\
\text { Return on investment (ROI)} &4\%\
\text { Sales } &\$8000000\
\end{array}$

If ABC requires a minimum return on its investments of 25 per cent,what is their residual income?
A) $1 950 000
B) $4 500 000
C) $6 750 000
D) $ 750 000

Question

ABC Inc.has the following information available for one of its divisions:
$\begin{array}{lr}
  \text {  Average operating assets} &\$5000000\
 \text {  Return on investment (ROI)} &4\%\
 \text { Sales } &\$8000000\
\end{array}$

If ABC requires a minimum return on its investments of 25 per cent,what is their residual income?
A) $1 950 000
B) $4 500 000
C) $6 750 000
D) $ 750 000

Quizplus · Accepted Answer

Residual income = Operating income - (Minimum required return * Operating assets). First, calculate operating income: Operating income = ROI * Operating assets = 4% * $5,000,000 = $200,000. Then, calculate the minimum required income: Minimum required income = 25% * $5,000,000 = $1,250,000. Finally, calculate residual income: Residual income = $200,000 - $1,250,000 = -$1,050,000. However, none of the options match this calculation, suggesting a possible misunderstanding in the question's details or a mistake in the calculation. Given the options, the closest approach to understanding the question might involve re-evaluating the calculation or the interpretation of the given options.

ABC IncHas the Following Information Available for One of Its Divisions