Question

Juniper Design Limited of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $420,000 on sales of $1,500,000. The company’s average operating assets for the year were $1,700,000 and its minimum required rate of return was 15%.

Required:

Compute the company’s residual income for the year.

Answer 1

Answer: 165,000

Step-by-step explanation:

To compute the company’s residual income for the year, we can use the formula:

Residual Income = Net Operating Income – (Minimum Required Rate of Return x Average Operating Assets)

Given: Net Operating Income = $420,000 sales = $1,500,000

Average Operating Assets = $1,700,000

Minimum Required Rate of Return = 15% = 0.15

Residual Income = Net Operating Income – (Minimum Required Rate of Return x Average Operating Assets)

Residual Income = $420,000 – (0.15 x $1,700,000)

Residual Income = $420,000 – $255,000

Residual Income = $165,000

Therefore, the company’s residual income for the year was $165,000.