Service Co. service center. For the month of May. Bella Vista s 12 Bella Vista S

Question

Service Co. service center. For the month of May. Bella Vista s 12 Bella Vista Service Co. is a computer had the following operating statistics (CMA adapted) $450,000 25,000 8,000 profit after taxes assets 500,000 Stockholders equity 200,000 of capital 6% Based on the above information, which one of the following statements is correct? Bella Vista Service Co. has a return on investment of 4%. B. Bella Vista Service Co. has a residual income of $(2,000). C. Bella Vista Service Co. has a return on investment of 5.6%. D. Bella Vista Service Co. has a residual income of $(22,000). E. None of the above.

Explanation / Answer

Answer:

Option A is Correct.

Return on Investment = Net Profit / Average Investment * 100
Return on Investment = 8,000 / 200,000 * 100
Return on Investment = 4%

Residual Income = Net Income – Minimum Required Return
Minimum Required Return = 200,000 * 6%
Minimum Required Return = $12,000

Residual Income = $8,000 - $12,000
Residual Income = - $4,000

Therefore, Option A i.e. Bella Vista Service Co. Has a Return on investment of 4% is Correct.

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