The performance of the manager of Division A is measured by residual income.Which of the following would increase the manager's performance measure?

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the minimum required return from the net operating income earned on average operating assets. Therefore, decreasing average operating assets would increase the residual income, leading to an improvement in the manager's performance measure. A decrease in net operating income or an increase in the minimum required return would decrease the residual income, resulting in a lower performance measure. An increase in average operating assets would have no effect on the residual income, as it is divided by the same denominator.

The Performance of the Manager of Division a Is Measured