Asked by Lilian Cohaus on Jul 25, 2024
Verified
The West Division of Cecchetti Corporation had average operating assets of $240,000 and net operating income of $42,200 in August. The minimum required rate of return for performance evaluation purposes is 19%.What was the West Division's residual income in August?
A) $(8,018)
B) $3,400
C) $(3,400)
D) $8,018
Residual Income
Profit remaining after all costs and expenses, including capital costs, have been deducted. It's often used to assess the profitability of a department or investment.
Operating Assets
Assets that are used for the day-to-day operations of a business, including both current and non-current assets.
Net Operating Income
The total profit of a company after operating expenses are subtracted, but before deducting interest and taxes.
- Understand the concept of residual income and how it's calculated for a division.
Verified Answer
$42,200 - (0.19 x $240,000) = -$3,400
The negative result indicates that the West Division did not generate enough income to meet the minimum required rate of return. Therefore, the correct choice is C, which represents the negative residual income of -$3,400.
Learning Objectives
- Understand the concept of residual income and how it's calculated for a division.
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