Question

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $ .

Answer 1

Answer:

Residual Income = $6,000

Explanation:

Residual income is the excess income of a firm leftover the opportunity cost of capital or over the desired income.

Given,

The minimum rate of return 12%

Average operating assets = $300,000

Net operating income = $42,000

We know,

Residual Income = Net Operating Income - (Average operating assets x the minimum rate of return)

Residual Income = $42,000 - ($300,000 x 12%)

Residual Income = $42,000 - $36,000

Residual Income = $6,000