Question

Calculate Sal Minella's residual income assuming the following information:

Operating earnings 425,000
Minimum acceptable return 12%
Invested capital 1,200,000
A. $193,000.
B. $132,000.
C. $281,000.
D. $54,900.

Answer 1

Sal Minella's residual income can be calculated by subtracting the product of the minimum acceptable return rate and the invested capital from the operating earnings. In this case, the residual income is $281,000.

Step-by-step explanation:

To calculate Sal Minella's residual income, we use the formula:

Residual Income = Operating Earnings - (Minimum Acceptable Return × Invested Capital)

The operating earnings are given as $425,000. The minimum acceptable return is 12%, which will be applied to the invested capital of $1,200,000.

Minimum Acceptable Return = 0.12 × $1,200,000 = $144,000

Now we can find the residual income:

Residual Income = $425,000 - $144,000 = $281,000

Therefore, the correct answer is C. $281,000.