Question

Chace products is a division of a major corp. Last year the division had total sales of $21,300,000, NOI of $575,100, and average operating assets of $5,000,000. The company's minimum required rate of return is 12%. What is the division's residual income?

1) $575,100
2) $1,175,100
3) $(1,980,900)
4) $(24,900)

Answer 1

The division's residual income is calculated by subtracting the minimum required return from the net operating income (NOI). With a minimum required return of $600,000 and an NOI of $575,100, the division's residual income is $(24,900), making option 4 correct.

Step-by-step explanation:

To calculate the division's residual income, you need to subtract the division's minimum required return from its net operating income (NOI). The minimum required return is the division's average operating assets multiplied by the company's minimum required rate of return.First, calculate the minimum required return:Average operating assets: $5,000,000Company's minimum required rate of return: 12%Minimum required return = $5,000,000 * 12% = $600,000Now, subtract this from the division's NOI to get the residual income:NOI: $575,100Residual income = $575,100 - $600,000Residual income = $(24,900).

Therefore, the correct answer is option 4, $(24,900).To calculate the division's residual income, we need to subtract the company's minimum required rate of return from the division's NOI. Residual income = NOI - (rate of return x average operating assets). In this case, the rate of return is 12% (0.12) and the average operating assets are $5,000,000. Plugging in the numbers, the calculation is: $575,100 - (0.12 x $5,000,000) = $575,100 - $600,000 = -$24,900. Therefore, the division's residual income is $(24,900). The correct answer is option 4) $(24,900).