Question

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of $420,000 on sales of $1,400,000. The company’s average operating assets for the year were $1,600,000 and its minimum required rate of return was 15%.

Required:
Compute the company’s residual income for the year.

Answer 1

Answer:

$180,000

Explanation:

Residual Income is the difference between net income of the company and the required rate of return. It determines the excess of income generate than the minimum return. The residual income serve a company to track its performance. It is a financial metric to assess company's internal performance. The formula to calculate the residual income is,

RI = Net operating Income - (Required rate of return * Cost of operating assets)

RI = $420,000 - (15% * $1,600,000 )

RI = $180,000