Question

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $
. (Enter your answer as a whole number without decimal places.)

Answer 1

To calculate the residual income for the toy department, we first need to determine the required return based on the minimum rate of return.

The formula for residual income (RI) is:

\[
\text{Residual Income} = \text{Net Operating Income} - \text{Required Return}
\]

First, we calculate the required return:

\[
\text{Required Return} = \text{Average Operating Assets} \times \text{Minimum Rate of Return}
\]

Given:

- Average Operating Assets = $300,000
- Minimum Rate of Return = 12% = 0.12

So,

\[
\text{Required Return} = 300,000 \times 0.12 = 36,000
\]

Next, we can calculate the residual income:

\[
\text{Residual Income} = 42,000 - 36,000 = 6,000
\]

Therefore, the department's residual income is:

\[
\text{Residual Income} = 6,000
\]

So, the answer is \( \boxed{6000} \).