Question

The following information relates to Kew Company's Vale Division for last year: sales .................................. $500,000 variable costs ......................... 300,000 fixed costs ............................ 50,000 return on investment ................... 25% minimum required rate of return ........ 6% Calculate the residual income reported by Vale Division last year.

Answer 1

$114,000

Step-by-step explanation:

The computation of the residual income is shown below:

As we know that

Residual Income = Net operating Income - Average Operating assets × Required rate of return

where,

Net Operating Income is

= Sales Revenue - Variable Costs - Fixed Costs

= $500,000 - $300,000 - $50,000

= $150,000

And,

Average operating Assets is

= Net Operating Income ÷ Return on Investment

= $150,000 ÷ 0.25

= $600,000

So, the residual income is

= $150,000 - $600,000 × 6%

= $150,000 - $36,000

= $114,000