Question

Residual income indicates how ___?

a. much operating income the division earns on every dollar of sales

b. much extra operating income a division generates above the minimum acceptable level

c. much return a division generates on average assets

d. efficiently a division uses its financial leverage to generate sales and thereby profits

Answer 1

Answer. b.) much extra operating income a division generates above the minimum acceptable level

Explanation :

Residual income = Operating income - (Oprating assets * Cost of capital).

Cost of capital is the minimum rate of return that a firm expect to recover from its business.

'Oprating assets * Cost of capital' indicates the minimum acceptable level of income that a division expects to generate.

Thus residual income means the extra operating thats a division generates above the minimum acceptable level