Midlands Design Ltd. of Manchester, England, is a company specializing in provid
ID: 2496508 • 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 £410,000 on sales of £1,400,000. The company’s average operating assets for the year were £1,600,000 and its minimum required rate of return was 14%. (The currency in the United Kingdom is the pound, denoted by £.)
Compute the company’s residual income for the year.
Average operating assets €1,600,000
Net operating income €410,000
Minimum required return 224,000
Residual income €
Explanation / Answer
Solution:
Caluculation of Residual Income:
Residual Income = € 4,10,000 - ( 14% * 16,00,000 )
= € 4,10,000 - € 2,24,000
= € 1,86,000
(B). Minimum Required Rate of Return:
= 16,00,000 * 14 / 100
= 2,24,000
OR
= 16,00,000 * 14%
= 2,24,000
Residual Income = Net Operating Income - (Minimum required rate of return * Average Operating Assets)