Residual income indicates how ________.
A) efficiently a division uses its financial leverage 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 the amount of operating income that a division generates above the minimum acceptable level, also known as the cost of capital. It is calculated as division's operating income minus the division's cost of capital multiplied by the division's assets. Therefore, option D is the correct choice. Options A, B, and C do not accurately define residual income.

Residual Income Indicates How ________