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3 years ago

Calculating Residual Income

Business

1 answer:

olga_2 [115]3 years ago

3 0

Answer:

1) $2,500,000

2) $425,000

Explanation:

The Average Operating Assets is given using the formula

= (Beginning Operating Assets + Ending Operating Assets) ÷ 2

on substituting the values from the question, we get

⇒ Average Operating Assets = (2,700,000 + 2,300,000) ÷ 2

⇒ Average Operating Assets = 5,000,000 ÷ 2

⇒ Average Operating Assets = $2,500,000

The Residual Income is calculated as:

= Operating Income - (Minimum Rate of Return × Average Operating Assets)

on substituting the values from the question, we get

⇒ Residual Income = $800,000 – (15% × $2,500,000)

⇒ Residual Income = $800,000 - $375,000

⇒ Residual Income = $425,000

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