Determine the March 2014 residual income for an investment center with the following information:
A)$5,180,000
B)$3,094,000
C)$2,086,000
D)$8,806,000

Question

Determine the March 2014 residual income for an investment center with the following information: 
A)$5,180,000 
B)$3,094,000 
C)$2,086,000 
D)$8,806,000

Quizplus · Accepted Answer

Residual income = operating income - (minimum required rate of return x total capital invested)
From the given information, we can calculate:
Total sales = $35,000,000
Total expenses = $24,600,000
Operating income = $10,400,000
Total capital invested = $100,000,000
Minimum required rate of return = 8%

Calculating the minimum required rate of return:
Minimum required rate of return = Total capital invested x minimum required rate of return
Minimum required rate of return = $100,000,000 x 8%
Minimum required rate of return = $8,000,000

Calculating residual income:
Residual income = $10,400,000 - $8,000,000
Residual income = $2,400,000

Therefore, the March 2014 residual income for the investment center is $2,400,000. The correct answer choice is C) $2,086,000, which is the closest approximation to $2,400,000.

Determine the March 2014 Residual Income for an Investment Center