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 $470,000 on sales of $2,200,000. The company’s average operating assets for the year were $2,400,000 and its minimum required rate of return was 11%. Required: Compute the company’s residual income for the year.

Answer 1

                                                                                                               

Residual Income (RI)

Residual Income (RI) is the money remaining after paying the necessary expenses and costs. It can be applied in personal finances and corporate operations.

Step – 1

          Residual Income = Net Operating Income – {Average Operating Assets x Minimum                          

                                                                                   Required Rate of Return [MRR]}

Step – 2

                                              = $4,70,000 - {$24,00,000 x 11%}

                                              = $4,70,000 - $2,64,000

                                              = $2,06,000