Question

Division A of ABC Company reported the following information
for the most recent year:

Turnover ................................   5
Residual income .........................  $144,000
Minimum required rate of return .........  15%
Margin ..................................   7%

Calculate the average operating assets reported by Division A
during the most recent year.

Answer 1

Answer:

Average operating Asset = $720000.

Explanation:

Turnover = Net sale / Average operating Asset

5 = Net sale / Average operating Asset

Net sale = 5 x Average operating Asset

Now putting the net sale value in Margin formula,

Margin = Net operating income / Net sale

0.07 = Net operating income / 5 x Average operating Asset

0.35 Average operating Asset = Net operating income

Now,

Residual income = Net operating income - (Average operating Asset x minimum required rate of return)

$144000 = 0.35 Average operating Asset - (Average operating Asset x 0.15)

$144000 = 0.35 Average operating Asset - 0.15 Average operating Asset

$144000 = 0.20 Average operating Asset

Average operating Asset = $144000 / 0.20 = $720000.