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Residual Income
Residual income is the amount of earnings a segment has generated in excess of the company's minimum requirement (the required rate of return = ROR). The residual income is a better tool for determining if an investment should be taken because it measures actual cash flow.
Wize Tip
Operating Income is sometimes called just 'Income' or 'Controllable Margin'
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Example: Residual Income
ABC Inc. is a subsidiary of Mega Corporation. ABC Inc has average operating assets of $1,000,000 and Mega Corporation requires a minimum rate of return of 20% on its investment. Sales at ABC Inc. totalled $400,000 in 2021, variable costs totalled $120,000; controllable fixed costs totalled $60,000 and allocated fixed costs totalled $30,000.
What is ABC Inc.'s residual income?
Practice: Residual Income
The following information is available for Maggie's Auto Sales
Average operating assets: $750,000
Operating Income: 90,000
Contribution margin: 175,000
Minimum rate of return: 10%
How much is Maggie's Residual Income?