Multiple Choice QuestionA division has residual income of $350,000. If the division has income of $600,000 and $2,500,000 in average assets, what is the target income %?Multiple choice question.8%15%10%25%
Question
Multiple Choice QuestionA division has residual income of 600,000 and $2,500,000 in average assets, what is the target income %?Multiple choice question.8%15%10%25%
Solution
To solve this problem, we need to use the formula for calculating the residual income, which is:
Residual Income = Actual Income - (Target Rate of Return * Average Operating Assets)
We know that the residual income is 600,000, and the average operating assets are $2,500,000. We need to find the target rate of return.
Rearranging the formula to solve for the target rate of return gives us:
Target Rate of Return = (Actual Income - Residual Income) / Average Operating Assets
Substituting the given values into the formula gives us:
Target Rate of Return = (350,000) / $2,500,000 = 0.10 or 10%
So, the target income % is 10%.
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