Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income

Question

Quizplus · Accepted Answer

Residual income measures the income earned by an investment center above and beyond the minimum required return on average operating assets. This encourages continued expansion as long as the investment center is able to earn a return in excess of the minimum required return. Return on investment (A) also considers the amount of assets invested, but may not encourage expansion if the investment center cannot earn a return that meets the required rate. Transfer pricing (B) and the contribution approach (C) do not directly relate to encouraging expansion or measuring the profitability of an investment center.

Which of the Following Measures of Performance Encourages Continued Expansion