Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

Question

Makenzie Chan

Business

16 September, 04:21

Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

+5

Answers (1)

Know the Answer?

Kiara Grant · Answer 1

Residual income = $666,270

Explanation:

The residual income is the amount left after the opportunity cost of capital deducted from the net operating income

Operating income=Contribution margin - Fixed cost

Operating income = 1,050,000 - 325,500 = $724,500

Residual income = Net income - (cost of capital * capital invested)

=$724,500 - (18% * 323,500) = 666270

Residual income = $666,270