In addition to considering both the division's operating income and its average total assets,residual income incorporates top management's target rate of return.

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Residual income is calculated by subtracting a required rate of return (usually set by top management) from the division's income, and then dividing by the division's average total assets. Therefore, residual income incorporates top management's target rate of return in its calculation.

In Addition to Considering Both the Division's Operating Income and Its