Question

"Its East Division has operating assets of $7,500,000, profit margin of 15%, and asset turnover of 0.80. Calculate the East Division's residual income."

Answer 1

$150,000

Step-by-step explanation:

Residual Income = Net Operating Income - (Operating assets x ROI)

Residual Income = 900,000 - ( 7,500,000 x 10%)

Residual Income = 900,000 - 750,000

Residual income = 150,000

NOTE: Assume ROI is 10%

Workings (net Operating Income)

Asset turnover = sales / net operating assets

0.8 x 7,500,000 = sales

sales = 6,000,000

Profit margin = Net operating income / sales

15% = Net operating income / 6,000,000

Net operating income = 6,000,000 x 15%

Net operating income = 900,000