Fabbri Wares is a division of a major corporation. The following data are for the latest year of operations: Sales$9,540,000 Net operating income$1,163,880 Average operating assets$3,000,000 The company's minimum required rate of return 14%?Required:?a. What is the division's return on investment (ROI)??b. What is the division's residual income?
What will be an ideal response?
a.
ROI = Net operating income ÷ Average operating assets = $1,163,880 ÷ $3,000,000 = 38.8%
b.
Residual income = Net operating income ? Minimum required rate of return × Average operating assets = $1,163,880 - (14% × $3,000,000) = $743,880
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