Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that
A)Residual income can be computed without regard to identifying an investment base.
B)Appropriate goal congruence behavior is more likely to occur when using residual income.
C)Residual income is well accepted in many organizations and often used in the financial press.
D)ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.
E)An imputed interest rate (cost of capital)does not have to be determined when using residual income.

Question

Quizplus · Accepted Answer

Residual income is considered a better measure of managerial performance than ROI because it encourages goal congruence behavior. This means that managers are incentivized to make decisions that benefit the company as a whole, rather than just focusing on maximizing their ROI. Residual income also takes into account the cost of capital, making it a more accurate measure of profitability. The other options are not correct because:

A) Residual income still requires identifying an investment base.
C) While residual income is accepted in many organizations, this is not a good reason for choosing it over ROI.
D) ROI does take into consideration the investment turnover ratio and return-on-sales percentage.
E) Residual income does require determining the cost of capital.

Managerial Performance Can Be Measured in Many Different Ways Including