Explanation:
The computation is shown below:
1. Average operating assets is
= (Opening operating assets + closing operating assets) ÷ 2
where,
Opening operating assets is
= Total assets - Land (undeveloped) - Investment in Buisson, S.A
=$2,020,000 - $180,000 - $250,000
= $1,590,000
And, the closing operating assets is
= Total assets - Land (undeveloped) - Investment in Buisson, S.A
= $2,100,000 - $170,000 - $280,000
= $1,650,000
So, average operating assets is
= ($1,590,000 + $1,650,000) ÷ 2
= $1,620,000
2.
Margin = Net operating income ÷ Sales
= $405,000 ÷ $4,050,000
= 0.1 or 10%
Turnover is
= Sales ÷ Average operating assets
= $4,050,000 ÷ $1,620,000
= 2.5
Return on Investment = Margin ×Turnover
= 0.1 × 2.5
= 0.25 or 25%
3. Residual Income = Net operating Income - (Average operating assets × Minimum required rate of return)
= $405,000 - ($1,620,000 × 15%)
= $405,000 - $243000
= $162,000
