All other things equal, which of the following would increase the residual income of a division
A)Decrease in average operating assets.
B)Decrease in sales.
C)Increase in minimum required return.
D)Decrease in net operating income.

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the minimum required return (based on the cost of capital) from the net operating income of a division divided by its average operating assets. If the average operating assets decrease, the residual income will increase, assuming all other variables remain constant. Therefore, a decrease in average operating assets would increase the residual income. Decrease in sales (B), increase in minimum required return (C), and decrease in net operating income (D) would all decrease the residual income.

All Other Things Equal, Which of the Following Would Increase