A is corrent. Residual income is equal to net operating profit minus the cost of capital based on average capital invested in the division. In this case, residual income is equal to $1,400,000 [$3,000,000 – ($20,000 000 × 8%)] B is incorrect because residual income is equal to net operating profit minus the cost of capital based on average capital invested in the division. B is incorrect because residual income is equal to net operating profit minus the cost of capital based on average capital invested in the division. D is incorrect because residual income is equal to net operating profit minus the cost of capital based on average captial invested in the division.
