Asked by Aerial Johnson on Jul 20, 2024
Verified
The following data pertains to Timmins Company's operations last year: 
Required:
a.Compute the company's average operating assets.
b.Compute the company's residual income for the year.
Operating Assets
Resources used in the day-to-day functioning of a business that contribute to generating revenue.
Residual Income
The amount of income that exceeds the minimum return expected from a particular investment or operation.
- Measure and appraise the residual income.
Verified Answer
HC
hannah carpenterJul 22, 2024
Final Answer :
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
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
Learning Objectives
- Measure and appraise the residual income.