Suppose a company evaluates divisional performance using both 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 ROI is less than 12%.

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the product of the minimum required rate of return (in this case, 12%) and the operating assets from the division's operating income. A positive residual income indicates that the division's ROI is greater than the company's minimum required rate of return of 12%, not less.

Suppose a Company Evaluates Divisional Performance Using Both ROI and Residual