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 with the additional project?
A)$4,200
B)$6,000
C)$6,600
D)$27,600

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 with the additional project?
A)$4,200
B)$6,000
C)$6,600
D)$27,600

Quizplus · Accepted Answer

The residual income (RI) is calculated as the operating income minus the product of the minimum required rate of return and the operating assets. With the additional project, the operating income increases to $34,200 ($30,000 + $4,200), and the operating assets increase to $230,000 ($200,000 + $30,000). The minimum rate of return is 12%, so the calculation is as follows: RI = $34,200 - (12% of $230,000) = $34,200 - $27,600 = $6,600.