Cornerstones of Managerial Accounting Study Set 2
Quiz 12: Performance Evaluation and Decentralization
Residual Income Is Sometimes Used to Overcome the Tendency of Roi
Residual income is sometimes used to overcome the tendency of ROI to discourage investments that are profitable for the company but that lower the division's ROI.
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Unlike ROI, residual income can encourage a short-run orientation.
In calculating residual income, the minimum rate of return is set by top management and is the same as the hurdle rate used for return on investment.
Residual income = Operating income - (Minimum rate of return x Average operating assets)
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