Question

Sand Company had sales of $400000, variable costs of $200000, and direct fixed costs totaling $100000. The company’s operating assets total $800000, and its required return is 10%. How much is the residual income?

Answer 1

Answer:

$20,000

Explanation:

Residual income is the income that is in excess of the minimum rate of return required on a company. So in this case the required return is 10% which is the minimum rate of return, any money made after the 10% return is residual income. First we need to find income

Income = Sales - Fixed costs - Variable Costs

            =400,000-100,000-200,000

             =100,000

Now we have to find the return, and we can find it by dividing income by total operating assets so return =

100,000/800,000=0.125= 12.5%

Residual income = Return - Required Return

                          = 12.5%-10%= 2.5%

The residual income is 2.5% of the operating assets so

800,000* 0.025=20,000