Exhibit 11-3
Dillon Company has the following information available for one of its divisions:
$\begin{array}{lr}
\text { Average operating assets } & \$ 4,000,000 \
\text { Sales } & \$ 4,800,000 \
\text { Return on investment (ROI) } & 30 \%
\end{array}$
-Refer to Exhibit 11-3.If Dillon's cost of capital is 25%,what is the division's residual income?
A)$ 200,000
B)$800,000
C)$440,000
D)$1,200,000
E)None of the answer choices is correct.

Question

Exhibit 11-3
Dillon Company has the following information available for one of its divisions:
 $\begin{array}{lr}
\text { Average operating assets } & \$ 4,000,000 \
\text { Sales } & \$ 4,800,000 \
\text { Return on investment (ROI) } & 30 \%
\end{array}$
-Refer to Exhibit 11-3.If Dillon's cost of capital is 25%,what is the division's residual income?
A)$ 200,000
B)$800,000
C)$440,000
D)$1,200,000
E)None of the answer choices is correct.

Quizplus · Accepted Answer

Residual income is calculated as: $ \text{Residual Income} = \text{Operating Income} - (\text{Cost of Capital} \times \text{Average Operating Assets}) $. First, calculate the operating income using ROI: $ \text{Operating Income} = \text{ROI} \times \text{Average Operating Assets} = 0.30 \times 4,000,000 = 1,200,000 $. Then, calculate the cost of capital: $ \text{Cost of Capital} = 0.25 \times 4,000,000 = 1,000,000 $. Finally, calculate the residual income: $ 1,200,000 - 1,000,000 = 200,000 $.

Exhibit 11-3 Dillon Company Has the Following Information Available for One

Exhibit 11-3
Dillon Company Has the Following Information Available for One