Question

Axis corporation's division a has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. the company expects a minimum required rate of return of 15% on its investments. what is the residual income for division a?

Answer 1

Residual income is named as such because it is the net income that you obtain. This includes all your total sales subtracted with bill payments, personal debts and other variable costs. Its formula is

Residual income = Net Operating Income - (Minimum Required Return * Average Operating Assets)

Substituting the values to the equation.

Residual Income = $100,000  - (0.15 × $500,000)
Residual Income = $25,000

The residual income gives the company an idea on its success and influences the company's decision to close or to expand. If the residual income is positive, then it means the company is earning more than its minimum. If the residual income is negative, then the company has a deficit.