The Fitzhugh Division of General Enterprises has a negative residual income of $540,000. Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:
A) should be pursued because it is attractive from both the divisional and corporate perspectives.
B) should be pursued because it is attractive from the divisional perspective although not from the corporate perspective.
C) should be pursued because it is attractive from the corporate perspective although not from the divisional perspective.
D) should not be pursued because it is unattractive from both the divisional and corporate perspectives.
E) should not be pursued because it is unattractive from the divisional perspective although it is attractive from the corporate perspective.

Question

Quizplus · Accepted Answer

The investment reduces the negative residual income, which is a measure of divisional performance. It also increases the overall residual income of the company, which is a measure of corporate performance. Therefore, the investment is attractive from both the divisional and corporate perspectives.

The Fitzhugh Division of General Enterprises Has a Negative Residual