Question

Calculating Residual Income East Mullett Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold 280,000 Gross margin $251,250 Selling and administrative expense 184,500 Operating income $66,750 Less: Income taxes (@ 40%) 26,700 Net income $40,050 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. East Mullett requires a minimum rate of return of 10%. Required: For East Mullett, calculate: 1. Average operating assets $ 2. Residual income $

Answer 1

Answer:

1. $425,000

2. $24,250

Explanation:

The computations are shown below:

1. For Average Operating Assets  

Average operating assets = (Beginning Operating Assets + Ending Operating Assets) ÷ 2

= ($390,000 + $460,000) ÷ 2

= $425,000

2. Residual income =  Operating income - (Average operating assets × Minimum Required Rate of Return)

= $66,750 - ($425,000 × 10%)

= $66,750 - $42,500

= $24,250