ADR Co. has established a target rate of return of 16% for all divisions. For the most recent year,
Division D generated sales of $10,000,000 and expenses of $7,500,000. Total assets at the
beginning of the year were $5,000,000 and total assets at the end of the year were $7,000,000.
1. Refer to ADR Company. In the most recent year, what was Division D's residual income?
a.
$ 960,000
b.
$1,380,000
c.
$1.540,000
d.
$1,700,000
ANS: C
Residual Income = $(10,000,000 - 7,500,000) - ((.16) *
$6,000,000)
= $(2,500,000 - 960,000)
=$1,540,000
2. Refer to ADR Company. For the most recent year, what was Division D's return on investment ?
a.
20.83 %
b.
35.71 %
c.
41.67 %
d.
50.00 %
ANS: C
ROI = Net Income/Average Total
Assets
= $(2,500,000/6,000,000)
= 41.67%
