Question

Selected information for ABC Company for the past
two years appears below:

Year 1
Residual income .....................   $3,750
Variable costs ......................   25% of sales
Fixed costs .........................   $172,500
Minimum required rate of return .....   9%

Year 2 
Residual income .....................   $74,000
Variable costs ......................   60% of sales
Fixed costs .........................   $110,000
Minimum required rate of return .....   16%
Turnover ............................   5

The margin in year 2 was three times larger than
the margin in year 1.

Calculate the amount of sales revenue recorded by
ABC Company in year 2.

Answer 1

Solution:

sales = 500,000

Explanation:

Sales / Average operating assets = 5

Sales = 5 x Average operating assets(AOA)

sales = 5 AOA

Residual income = $74,000

$74,000 = Sales - 60%sales - $110,000 - (16% x AOA)

$74000 = Sales - 0.6sales -$110,000 - 0.16AOA

$74000 = 0.4Sales - $110,000 - 0.16AOA

$74000 = (0.4 X 5 AOA) -$110,000 - 0.16 AOA

$74,000 = 2AOA - $110,000 - 0.16AOA

$74,000 = 1.84AOA - $110,000

AOA = 184000/1.84

AOA = 100,000

Sales = 5AOA

sales = 5 x 100,000 = 500,000