The following data pertains to Timmins Company\'s operations last year: Return o
ID: 2458349 • Letter: T
Question
The following data pertains to Timmins Company's operations last year:
Return on investment (ROI).............
20%
Sales..................................................
$800,000
Margin...............................................
5%
Minimum required rate of return......
16%
Required:
a.Compute the company's average operating assets.
b.Compute the company's residual income for the year.
Return on investment (ROI).............
20%
Sales..................................................
$800,000
Margin...............................................
5%
Minimum required rate of return......
16%
Explanation / 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
Minimum required net operating income = Average operating asset * Minimum required return
= $200,000 * 16% = $32,000
Actual Net Operating Income = $40,000
Residual Income = $40,000 - $32,000 = $8,000
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