Calculating Residual Income Pelican Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold 280,000 Gross margin $251,250 Selling and administrative expense 184,400 Operating income $66,850 Less: Income taxes (@ 40%) 26,740 Net income $40,110 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Pelican requires a minimum rate of return of 10%. Required: For Pelican, calculate: 1. Average operating assets $ 2. Residual income $

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Business

Gidget

9 October, 08:56

Calculating Residual Income Pelican Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold 280,000 Gross margin $251,250 Selling and administrative expense 184,400 Operating income $66,850 Less: Income taxes (@ 40%) 26,740 Net income $40,110 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Pelican requires a minimum rate of return of 10%. Required: For Pelican, calculate: 1. Average operating assets $ 2. Residual income $

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Answers (1)

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Justine Rocha · Answer 1

(A) $425,000

(B) $24,350

Explanation:

(a) Average Operating Assets:

= (Beginning Operating Assets + Ending Operating Assets) : 2

= ($390,000 + $460,000) : 2

= $425,000

Therefore, the average operating assets is $425,000.

(b) Residual Income:

= Operating Income - (Minimum Rate of Return * Average Operating Assets)

= $66,850 - (10% * $425,000)

= $66,850 - $42,500

= $24,350