Residual income indicates how ________.
A) efficiently a division uses its average assets to generate sales and thereby profits
B) much operating income the division earns on every dollar of sales
C) much return a division generates on average assets
D) much extra operating income a division generates above the minimum acceptable level

Question

Quizplus · Accepted Answer

Residual income is a measure of how much extra operating income a division generates above the minimum acceptable level. It is calculated by subtracting the division's required rate of return (determined by the company) from its operating income. A positive residual income indicates that the division is generating profits above the minimum required, while a negative residual income means it is not meeting the required rate of return. Therefore, option D is the correct answer.

Residual Income Indicates How ________