Answer:
$224,800
Explanation:
Given that,
Average total assets = $5,930,000;
Sales = $5,505,000;
Cost of goods sold = $3,290,000
Operating expenses = $1,160,000
Target income = 14% of average invested assets
Residual income is calculated by the following formula:
= Net income - Target income
= Net income - (Average operating assets × Return)
So, there is a need to calculate the net income first. It is calculated as follows:
Gross profit = Sales - Cost of goods sold
= $5,505,000 - $3,290,000
= $2,215,000
Net income = Gross profit - Operating expenses
= $2,215,000 - $1,160,000
= $1,055,000
Therefore, the residual income is determined by the difference between net income and target income. It is calculated as follows:
= Net income - (Average operating assets × Return)
= $1,055,000 - ($5,930,000 × 0.14)
= $1,055,000 - $830,200
= $224,800
