The following data has been provided for a company’s most recent year of operations:

Return on investment 20%
Average operating assets $ 100,000
Minimum required rate of return 15%

The residual income for the year was closest to:

Question

The following data has been provided for a company’s most recent year of operations:

Return on investment    20%
Average operating assets    $ 100,000
Minimum required rate of return    15%

The residual income for the year was closest to:

BlackTom AI · Accepted Answer

To analyze the residual income question, I’ll first restate the data and the formula involved.
We have: Return on investment (ROI) = 20% on Average operating assets of $100,000, and Minimum required rate of return (MRRR) = 15% on the same asset base. Residual income (RI) is calculated as: RI = Operating income − (MRRR × Average operating assets).
Now evaluate each option step by step.
Option  "$20,000": This number represents the operating income rather than RI. It is found by applying ROI to assets (0.20 × $100,000 = $20,000). However, RI requires subtracting the minimum required return on the asset base, not simply reporting income. Therefore this option corresponds to operating income, not residual income.
Option  "$3,000": This value could come from a miscalculation, such as subtracting a portion of the required return or misapplying the rate. If you subtract 15% of $100,000 from $20,000, you get $20,000 − $15,000 = $5,000, not $3,000. Hence $3,000 does not align with the RI formula given.
Option  "$5,000": This aligns with the residual income formula. Compute operating income as 0.20 × $100,000 = $20,000, and compute the required return as 0.15 × $100,000 = $15,000. Subtracting gives $20,000 − $15,000 = $5,000. This is exactly the RI amount implied by the data.
Option  "$15,000": This value matches the total minimum required return in dollars (MRRR × assets). While it represents the cost of capital component, RI subtracts this amount from operating income; it is not the residual income itself. Treating $15,000 as RI would ignore the actual operating income figure and thus misstate RI.
In summary, the key idea is to separate the generation of operating income from the cost of capital on the asset base, and then apply the subtraction to obtain RI. The correct approach yields an RI of $5,000, derived from $20,000 operating income minus $15,000 in required return on assets.

SU25-BL-BUS-A325-5063 Practice Test #3 (new)

The following data has been provided for a company’s most recent year of operations: Return on investment 20% Average operating assets $ 100,000 Minimum required rate of return 15% The residual income for the year was closest to:

View Explanation

Log in for full answers

Similar Questions

The performance of the manager of Division A is measured by residual income. Which of the following would decrease the manager's residual income?

Suppose a manager's performance is to be evaluated by residual income. Which of the following will NOT result in an increase in the residual income figure for this manager, assuming other factors remain constant?

The Northern Division of the Smith Company had average total operating assets of $150,000 last year. Its minimum required rate of return was 12%. The division reported operating income of $20,000. What was the residual income for the Northern Division last year?

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler