Question

Residual income is defined as

A. variable contribution margin less the minimum rate of return on average operating assets.

B. controllable income less the minimum rate of return on average operating assets.

C. contribution margin less controllable fixed costs.

D. controllable margin divided by average operating assets.

Answer 1

Residual Income is the excess on net income over the entity’s minimum required return.

Option a is incorrect as it is not excess of net income over the minimum required rate of return.

Option b is the correct option as, Controllable income is the Net income (Sales – variable costs – Fixed costs) and by subtracting minimum return on average operating assets, Residual income will be computed.

Option c is incorrect option as it is not excess of net income over the minimum required rate of return.

Option d is incorrect as controllable margin divided by average operating assets is not excess of net income over entity’s minimum required return.

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