The manager of Gamma Division projects the following for next year:
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
$\begin{array}{ll}
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$
-Refer to the Figure.What is the residual income for Gamma Division without the additional investment?
A)$4,200
B)$6,000
C)$6,600
D)$24,000

Question

The manager of Gamma Division projects the following for next year:
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional income. The company's minimum rate of return is 12%.
 $\begin{array}{ll}
\text { Sales } & \$ 100,000 \
\text { Operating income } & \$ 30,000 \
\text { Operating assets } & \$ 200,000
\end{array}$
-Refer to the Figure.What is the residual income for Gamma Division without the additional investment?
A)$4,200
B)$6,000
C)$6,600
D)$24,000

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the minimum required return on operating assets. Without the additional investment, the operating income is $30,000 and the operating assets are $200,000. The minimum required return is 12% of $200,000, which is $24,000. Therefore, the residual income is $30,000 - $24,000 = $6,000.