Question

A segment of a company with an ROI of 25% has an income of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is: A. $14,280 B. $33,600 C. $21,000 D. $23,520

Answer 1

Answer:

D. $23,520

Explanation:

The cost of investment in the segment shall be determined from the ROI formula in the following mentioned manner:

ROI=Net profit/cost of investment

25%=$84,000/Cost of investment

Cost of investment=$336,000

The residual income of the segment of  any company is determined through following mentioned formula:

Residual income=Net income-(required rate of return*cost of investment)

Residual income=$84,000-(18%*$336,000)

                           =$23,520

So based on the above calculations, the answer is  D. $23,520