A company which favours the residual income approach to measure performance wants managers to:
A)concentrate on maximising a percentage return.
B)maximise return on sales.
C)concentrate on maximising an absolute amount of dollars.
D)maximise the investment turnover ratio.

Question

Quizplus · Accepted Answer

The residual income approach measures the excess income generated by a business after accounting for the cost of the capital used to generate that income. Therefore, the focus is on maximizing the absolute amount of dollars, which represents the residual income. Maximizing a percentage return or return on sales would not necessarily lead to the highest residual income. Maximizing the investment turnover ratio would focus on generating more revenue but may not take into account the cost of capital and could potentially decrease residual income.

A Company Which Favours the Residual Income Approach to Measure