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11 June, 13:49

Calculating Residual Income Pelican Manufacturing earned operating income last year as shown in the following income statement: Sales $531,250 Cost of goods sold 280,000 Gross margin $251,250 Selling and administrative expense 184,400 Operating income $66,850 Less: Income taxes (@ 40%) 26,740 Net income $40,110 At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000. Pelican requires a minimum rate of return of 10%. Required: For Pelican, calculate: 1. Average operating assets $ 2. Residual income $

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  1. 11 June, 14:43
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    (A) $425,000

    (B) $24,350

    Explanation:

    (a) Average Operating Assets:

    = (Beginning Operating Assets + Ending Operating Assets) : 2

    = ($390,000 + $460,000) : 2

    = $425,000

    Therefore, the average operating assets is $425,000.

    (b) Residual Income:

    = Operating Income - (Minimum Rate of Return * Average Operating Assets)

    = $66,850 - (10% * $425,000)

    = $66,850 - $42,500

    = $24,350
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