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 $480,000 on sales of $1,200,000. The company’s average operating assets for the year were $1,400,000 and its minimum required rate of return was 15%.

Required:

Compute the company’s residual income for the year.

Answer 1

The residual income is the profit that a company made in excess of the required return.

It is calculated using below formula

Residual income = Operating Income - (Operating assets * Cost of capital)

Let’s put the values from the question

Residual income = $480,000 - ($1,400,000 * 0.15)

                             = $480,000 - $210,000

                                = $270,000

So the residual income of the company will be $270,000