Question

g Our company reported the following financial numbers for one of its divisions for the year; average total assets of $5,800,000; sales of $5,375,000; cost of goods sold of $3,225,000; and operating expenses of $1,147,000. Assume a target income of 15% of average invested assets. Compute residual income for the division:

Answer 1

Answer:

Residual income = $133,000

Explanation:

Sales                                   $5,375,000

Less: COGS                        $3,225,000

Gross profit                        $2,150,000

Less: Operating expense  $1,147,000

Net income                       $1,003,000

Residual income = Net income - (Average operating assets * return)

Residual income = $1,003,000 - (5,800,000 * 15%)

Residual income = $1,003,000 -  $870,000

Residual income = $133,000