Final answer:
To calculate residual income, subtract the product of operating assets and desired ROI from the operating income. Using the provided data, the residual income is $5,000.
Step-by-step explanation:
The question is centered on a concept in financial management known as residual income (RI), which is a measure of the income that an investment or business segment makes above the minimum required return. Here, the student is given the operating income, which is $20,000, the operating assets, which are $50,000, and the desired return on investment (ROI), which is 30%. To calculate the residual income, we use the formula:
RI = Operating Income - (Operating Assets × Desired ROI)
Substituting the provided values:
RI = $20,000 - ($50,000 × 0.30)
RI = $20,000 - $15,000
RI = $5,000
Therefore, the residual income is $5,000, which is the amount of income that exceeds the profitability target based on the desired ROI.