Question

Division A of ABC Company sold 47,000 units during the most recent year.

The selling price was $20 per unit and the per unit variable costs were $8. The fixed costs totaled $10,000.

Division A reported a turnover of 4 for the most recent year and the minimum required rate of return was 17%.

Calculate the residual income reported by Division A during the most recent year.

Answer 1

Number of units sold = 47,000

Selling price per unit = $20

Sales = Number of units sold x Selling price per unit

= 47,000 x 20

= $940,000

Variable cost per unit = $8

Total variable cost = Number of units sold x Variable cost per unit

= 47,000 x 8

= $376,000

Total fixed cost = $10,000

Net operating income = Sales - Total variable cost - Total fixed cost

= 940,000 - 376,000 - 10,000

= $554,000

Turnover = Sales/Average operating assets

4 = 940,000/Average operating assets

Average operating assets = 940,000/4

= $235,000

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

= 554,000 - (235,000 x 17%)

= 554,000 - 39,950

= $514,050

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