Brookings Company evaluates its managers on the basis of return on investment.Division Three has a return on investment (ROI)of 15%,while the company as a whole has an ROI of only 10%.Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?
A) ROI.
B) Residual income.
C) Both ROI and residual income will motivate the manager to accept the project.
D) Neither ROI nor residual income will motivate the manager to accept the project.

Question

Quizplus · Accepted Answer

Since Division Three's ROI of 15% is higher than the company's ROI of 10%, the manager's evaluation is based on exceeding the company's ROI. Therefore, a higher residual income, which is calculated by subtracting the minimum required return on investment from the actual return on investment, would motivate the manager to accept the project. This is because the manager will be evaluated based on generating a higher residual income that is in excess of the minimum required return. Therefore, the correct answer is B.

Brookings Company Evaluates Its Managers on the Basis of Return