Asked by Mikaela Forcum on Jun 14, 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
Assets used by an organization in its day-to-day operations to generate revenue, excluding investments and inventory.
Residual Income
The amount of net income an entity has after deducting all necessary expenses and required returns on investments, representing leftover earnings.
Operations
The activities involved in the day-to-day functions of a business related to producing and delivering its products or services.
- Analyze financial data to compute margin, turnover, and ROI for performance evaluation.
Verified Answer
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
- Analyze financial data to compute margin, turnover, and ROI for performance evaluation.
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