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 $600,000 on sales of $3,000,000. The company’s average operating assets for the year were $2,800,000 and its minimum required rate of return was 18%.
Required:
Compute the company’s residual income for the year.
Average Operating Assets-
Net Operating Income-
Minimum required return-
residual income-

Answer 1

Answer:

a. Residual income for the year is calculated as:

   Residual income = Net operating income - Imputed cost of capital

   Residual income = $600,000 - 18% x 2,800,000

   Residual income = $96,000

b. Average operating assets = $2,800,000

c. Net operating income = $600,000

d. Minimum rate of return = 18%

e. Residual income = $96,000                                                                                                                                                              

Explanation:

Residual income is the excess of net operating income over imputed cost of capital. The imputed cost of capital is equal to minimum required  rate of return multiplied by average operating assets.