BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of BFF, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was:
A) $24,960.
B) $36,000.
C) $156,000.
D) $192,000.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

Residual income is calculated as the net operating income minus the product of the invested capital and the imputed interest rate. Here, the net operating income is 16% of $1,200,000, which is $192,000. The imputed interest is 13% of $1,200,000, which is $156,000. Therefore, the residual income is $192,000 - $156,000 = $36,000.

BFF Corporation Uses an Imputed Interest Rate of 13% in the Calculation