ECONOMICS

Detailed explanation-1: -The dollar amount of division operating profit in excess of the division’s cost of acquiring capital to purchase operating assets; it is calculated as Residual income = Operating income − (Percent cost of capital × Average operating assets).

Detailed explanation-2: -Residual income is calculated as net income minus a deduction for the cost of equity capital. The deduction, called the equity charge, is equal to equity capital multiplied by the required rate of return on equity (the cost of equity capital in percent).

Detailed explanation-3: -RI = Controllable Margin – Average of Operating Assets * Required Rate of Return. Where: Controllable margin, which is also known as segment margin, refers to the project’s revenue less expenses. Required rate of return is the minimum amount of return that a company is willing to accept from a given investment.

Detailed explanation-4: -Return on investment (ROI) is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100% when expressed as a percentage.