Midlands Design Ltd. of Manchester, England, is a company specializing in provid
ID: 2452987 • Letter: M
Question
Midlands 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 £490,000 on sales of £2,200,000. The company’s average operating assets for the year were £2,400,000 and its minimum required rate of return was 11%. (The currency in the United Kingdom is the pound, denoted by £.)
Required:
Compute the company’s residual income for the year.
Midlands 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 £490,000 on sales of £2,200,000. The company’s average operating assets for the year were £2,400,000 and its minimum required rate of return was 11%. (The currency in the United Kingdom is the pound, denoted by £.)
Explanation / Answer
Answer: Calculation of the company's Residual income for the year:
Residual income=Net operating income-(Average operating assets*Minimum required rate of return)
=£490,000-(£2,400,000*11%)
=£226000
Average operating assets £2,400,000 Net operating income £490,000 Minimum required return 11% Residual income £226000