The following data pertains to Timmins Company's operations last year:?Return on investment (ROI)20%?Sales$800,000?Margin5%?Minimum required rate of return16%Required:a. Compute the company's average operating assets.b. Compute the company's residual income for the year.
What will be an ideal response?
a. ROI = Margin × Turnover
20% = 5% × Turnover
Turnover = 20% ÷ 5% = 4
Turnover = Sales ÷ Average operating assets
4 = $800,000 ÷ Average operating assets
Average operating assets = $800,000 ÷ 4 = $200,000
b. Before the residual income can be computed, we must first compute the company's net operating income for the year:
Margin = Net operating income ÷ Sales
5% = Net operating income ÷ $800,000
Net operating income = 5% × $800,000 = $40,000
| ? | Average operating assets | $200,000 |
| ? | Minimum required rate of return | × 16% |
| ? | Minimum required net operating income | $32,000 |
| ? | Actual net operating income | $40,000 |
| ? | Minimum required net operating income | 32,000 |
| ? | Residual income | $8,000 |
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