Final answer:
Residual income is calculated by subtracting the product of Operating assets and the Desired ROI from the Operating income, making option 'b' the correct answer.
Step-by-step explanation:
Residual income is a measure used in performance management to assess the profitability of a department or investment center.
It is calculated by taking the Operating income and subtracting the product of Operating assets multiplied by the Desired ROI (Return on Investment). Thus, the correct formula for calculating residual income is:
b. Operating income - (Operating assets x Desired ROI)
This measure helps companies determine if a division is truly contributing to the company's overall profitability above and beyond what is expected as a minimum rate of return on its assets.
Option 'b' is the correct answer.