The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100
Variable manufacturing costs per unit $25
Variable administrative costs per unit $5
Total fixed manufacturing overhead $20,000
Total fixed administrative costs $5,000
Residual income is:
A)The same as return on investment
B)A nonfinancial measure of performance
C)Net operating income minus a required rate of return X average operating assets
D)Sales divided by net operating income

Question

Quizplus · Accepted Answer

Residual income is calculated as net operating income minus a required rate of return multiplied by the average operating assets. It is a financial measure of performance that indicates how much income is generated above a minimum required rate of return on invested assets. Therefore, option C is the correct answer. Options A, B, and D are incorrect as they do not define residual income accurately.

The Machining Division Has a Capacity of 2,000 Units