Consider the Following Statements About Residual Income

question 49

Multiple Choice

Consider the following statements about residual income:
I. Residual income incorporates a firm's cost of acquiring investment capital.
II. Residual income is a percentage measure, not a dollar measure.
III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are) true?

• A) I only.
• B) II only.
• C) I and II.
• D) II and III.
• E) I and III.

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Definitions:

Net Operating Income

The profit generated from a company's everyday business operations, excluding expenses and taxes.

Fixed Manufacturing Overhead

The total of all costs that remain constant regardless of the level of production, including expenses such as rent, utilities, and salaries of permanent staff in a manufacturing setting.

Variable Costing

An accounting method that only includes variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs, excluding fixed overhead costs.

Segmented Income Statement

A financial statement that breaks down income, expenses, and profit margins by specific segments, such as products, services, or geographical regions, within a company.