Question

the west Division of Cecchetti Coporation 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 minimum required return in August ?The right answer is $45,600

Answer 1

The minimum required return in August for the West Division of Cecchetti Corporation is $45,600

Residual income is the excess of net income over the minimum required return where the minimum required return is computed by multiplying the minimum rate of return with the average operating assets of the company. Residual income is a measure used to assess the performance of the investment centre's management.

Cecchetti Corporation informs about its west division:

Average operating assets = $240,000

Net operating income = $42,200.

The minimum required rate of return = 19%.

The formula for minimum required return:

Minimum required return = Average operating assets * Minimum required return rate

Minimum required return = $240,000 * 19%

Minimum required return = $45600

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