To avoid suboptimization,many companies prefer to evaluate their investment centers using:
A) Residual income instead of return on investment.
B) Return on investment instead of residual income.
C) Gross margin instead of contribution margin.
D) Sales instead of income.

Question

Quizplus · Accepted Answer

Return on investment (ROI) only evaluates the profitability of a specific investment, but it may not consider the opportunity cost of not investing in other projects. By contrast, residual income considers the cost of capital and takes into account the returns that are expected by investors, which makes it a more suitable measure for evaluating the overall performance of an investment center. Therefore, using residual income instead of ROI can help companies avoid suboptimization.

To Avoid Suboptimization,many Companies Prefer to Evaluate Their Investment Centers