ACCT 323 Final Review Pachage #24

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Why using 550,000 times ROR not using 90000?

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Good question Lingfeng,

The formula that you are using is:

Residual income = (Net operating income – (Average operating assets * Minimum rate of return)

Here we are solving for the minimum rate of return.

Therefore, we structure it as: 90,000 = 130,000 – (550,000* X), where we are solving for X.

As you can see in the formula, it is average operating assets multiplied by the minimum rate, not residual income. This is why we use 550000 rather than 90000.

Hope this makes sense,

Alex

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