Question

he West Division of Cecchetti Corporation had average operating assets of $682,000 and net operating income of $129,000 in August. The minimum required rate of return for performance evaluation purposes is 21%.

What was the West Division's minimum required return in August?

Multiple Choice

• $27,090

• $143,220

• $170,310

• $129,000

Answer 1

Minimum required return is 21%.

Average Operating Assets are $ 682,000.

Any return below the minimum will not be considered for performance evaluation.

The net operating income for August = $ 129,000

Rate of return for August = 129,000 / 682,000

= 18.9%

This is less than the required rate of return of 21% as required for performance evaluation.

Minimum return required = 682,000 * 21%

= $ 143,220

Thus the shortfall is of 143,220 - 129,000

= $ 14,220

Minimum required return is $ 143,220

Option B