The following data are available for the South Division of Redride Products, Inc. and the single product it makes:
-If South wants a residual income of $50,000 and the minimum required rate of return is 10%,the annual turnover will have to be:
A)0.32
B)0.80
C)1.25
D)1.50

Question

The following data are available for the South Division of Redride Products, Inc. and the single product it makes: 
-If South wants a residual income of $50,000 and the minimum required rate of return is 10%,the annual turnover will have to be:
A)0.32 
B)0.80 
C)1.25 
D)1.50

Quizplus · Accepted Answer

Turnover = Sales F1F1F1S1F1F1F10 Average operating assets
We need to determine the Sales that would generate a residual income of $50,000.
Residual income = Net operating income - Average operating assets F1F1F1S1F1F1F10 Minimum required rate of return
$50,000 = Net operating income - ($1,500,000 F1F1F1S1F1F1F10 10%)
Net operating income = $50,000 + ($1,500,000 F1F1F1S1F1F1F10 10%)= $200,000
Dollar sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 CM ratio
= ($200,000 + $280,000)F1F1F1S1F1F1F10 [($20 per unit - $12 per unit)/$20 per unit]
= $480,000 F1F1F1S1F1F1F10 ($8 per unit/$20 per unit)
= $480,000 F1F1F1S1F1F1F10 0.40
= $1,200,000
Turnover = Sales F1F1F1S1F1F1F10 Average operating assets
= $1,200,000 F1F1F1S1F1F1F10 $1,500,000 = 0.8

The Following Data Are Available for the South Division of Redride