Question

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $460,000 on sales of $1,200,000. The company’s average operating assets for the year were $1,400,000 and its minimum required rate of return was 11%.

Required:
Compute the company’s residual income for the year.

Average operating assets
Net operating income
Minimum required return
Residual income

Answer 1

Answer:

$306,000

Explanation:

Average operating assets = $1,400,000

Net operating income = $460,000

Sales = $1,200,000

Minimum required return = 11% of Average operating assets

                                          = 0.11 × $1,400,000

                                          = $154,000

Residual income = Net operating income - Minimum required return

                            = $460,000 - $154,000

                             = $306,000