XYZ Design England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £800,000 on sales of £2,000,000. The company’s average operating assets for the year were £2,200,000 and its minimum required rate of return was 20%. (The currency in the United Kingdom is the pound, denoted by £)
Compute the company’s residual income for the year.
Answer : company’s residual income for the year = £ 360,000
Working notes for the above answer:
we have provided with the information as follow
XYZ Design England’s Last year the company had net operating income of £800,000
on sales of £2,000,000.
The company’s average operating assets for the year were £2,200,000
its minimum required rate of return was 20%.
Residual income is the income in excess of a desired minimum return
The company requires a return of £440,000
= £2,200,000 * 20%
=£ 440,000
(calculated by taking the total assets of £2,200,000 times the required 20%).
The residual income is the excess of the £800,000operating profit over the required return of £440,000, which gives you £ 360,000.
= £ 800,00 – £440,000
= £ 360,000.
