Question

The New Products Division of Testar Company, had operating income of $8,000,000 and operating assets of $44,800,000 during the current year. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Assuming that the new product is put into production, calculate the residual income for the division.

Multiple Choice

• $832,000

• $872,000

• $528,000

• $672,000

Answer 1

Answer

--Correct Answer = Option #2: $ 872,000

Working		Before	New Product	Total
A	Operating Assets	$44,800,000	$8,500,000	$53,300,000
B	Operating Income	$8,000,000	$1,400,000	$9,400,000
C	Required rate of Investment			16%
D = A x C or A x 16%	Required Income			$8,528,000
E = B - D	Residual Income			$872,000 = Answer