Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the investment:
A) should not be approved because it reduces divisional return on investment.
B) should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered.
C) should be approved because it produces $60 000 residual income for the division.
D) should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers.

Question

Quizplus · Accepted Answer

Residual income is a measure of absolute profit in dollars, unlike ROI which is a percentage measure of profit relative to investment. If an investment increases the residual income, it means the division is generating more absolute profit, aligning with the goal of maximizing overall company profit, hence supporting goal congruence. The reduction in ROI is less relevant in this context since the absolute dollar profit (residual income) is increasing.

Braham Farms Has a Return on Investment of 15 Per