Question

n the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

Multiple Choice

The New Products division yielded ROI that was lower than the target ROI.

Residual income for the New Products division was $832,000.

The New Products division yielded no residual income.

All of these are correct.

Answer 1

• All working forms part of the answer
• Working:

A	Operating Income	$          8,000,000.00
B	Operating Assets	$        44,800,000.00
C = (A/B) x 100	Actual ROI	17.9%
D [given]	Target ROI	16%
E = B x D	Target Income	$          7,168,000.00
F = A - E	Residual Income	$              832,000.00

• Above working shows that:

>Actual ROI is MORE than Target ROI of 16% [not “LESS than” as given in Option #1]

>Residual Income = $ 832,000

• Hence, the correct answer is Option #2: Residual income for the New Products division was $832,000