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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 $410,000 on sales of $2,100,000. The company’s average operating assets for the year were $2,300,000 and its minimum required rate of return was 16%.Required:a.Compute the company’s residual income for the year.b.Average Operating Assets-c.Net Operating Income-d.Minimum required return-e.residual income-

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Answer:

a, Residual income = $48,000

b, Average Operating Assets = $2,300,000

c, Net Operating Income = $410,000

d, Minimum required return = 16%

Explanation:

Given that:

  • Net operating income:  $410,000
  • Sales: $2,100,000.
  • Required rate of return: 16% = 0.16
  • Average operating assets: $2,300,000

a, As we know that, residual income for the year is calculated as:

  Residual income = Net operating income - Imputed cost of capital

<=>  Residual income = $410,000 - 16% x 2,300,000

<=> Residual income = $42,000

b, Average Operating Assets = $2,300,000

c, Net Operating Income = $410,000

d, Minimum required return = 16%

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