Residual income is the dollar amount of division operating profit in excess of the division's cost of acquiring capital to purchase operating assets.

Question

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Residual income is calculated as the division's operating profit minus the cost of capital (or the division's required rate of return multiplied by its operating assets). This represents the amount of profit that remains after the division has covered its cost of capital, and is therefore a measure of its economic value added.

Residual Income Is the Dollar Amount of Division Operating Profit