Suppose a company evaluates divisional performance using both return on investment (ROI) and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its return on investment is less than 12%.

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the product of the minimum required rate of return and the operating assets from the division's operating income. A positive residual income, like the $6,000 mentioned, indicates that the division's return on investment exceeds the company's minimum required rate of return of 12%, not that it is less.

Suppose a Company Evaluates Divisional Performance Using Both Return on Investment