Question

The following information relates to the Quilt Division of TDS Corporation for last year:

Sales	$	200,000
Contribution margin	$	90,000
Net operating income	$	65,000
Average operating assets	$	500,000
Minimum required rate of return		10	%

Assume that Quilt was being evaluated solely on the basis of residual income. Which of the following investment opportunities would Quilt want to invest in?

	An investment that generates a return of 12%			An investment that generates a return of 16%
A)		Yes			Yes
B)		No			Yes
C)		Yes			No
D)		No			No

Option A

Option C

Option D

Option B

Answer 1

Minimum Required Rate of Return: Minimum Required rate of return is used to find the profitability of a project of the company.It is the minimum value of the comunt at which the comany epects its returns. If the Rate of return is more than the minimum required rate of return for any project, the company can accpt the project

Given,

Sales $200,000

Contribution Margin $90,000

Net Operating Income $65,000

Average operating assets $500,000

Minimum Required Rate of Return 10%

An investment generats a return of 12% and another investment that generates a return of 16%

If the investors evaluates the project based on the residual income, they accepts the projects whose retun is more than the required rate of return

Both the investment options have the returns more than 10% of Minimum Required rate of return.

So, Quilt can choose from any one of the available two opportunities.

Hence Option A is Correct.