Residual income should not be used to evaluate a profit center.

Question

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Residual income is a measure of a profit center's performance that takes into account the cost of capital. It is calculated by subtracting the cost of capital from the profit center's operating income. Residual income should not be used to evaluate a profit center because it is not a measure of the profit center's profitability. Profitability is measured by the profit center's return on investment, which is calculated by dividing the profit center's operating income by its total assets.

Residual Income Should Not Be Used to Evaluate a Profit