Which of the following is a legitimate disadvantage of residual income?
A) It does not explicitly capture cost of capital in the computation of the measure.
B) It does not encourage managers to accept all projects above the minimum return.
C) It is not an effective basis for comparing divisions of substantially different sizes
D) It does not provide any new information beyond ROI.

Question

Quizplus · Accepted Answer

The most commonly stated disadvantage of the residual income measure is that it makes no distinction between small and large divisions; it measures performance in absolute dollars rather than percentages. Once both divisions capture their target cost, they are regarded as equals, which could be viewed as a bias in favor of the larger division.

Which of the Following Is a Legitimate Disadvantage of Residual