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sarasmith06 sarasmith06
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A month ago
A disadvantage of evaluating managers' performance based on ROI is that it can lead to undesirable managerial actions. Residual income can overcome many of the problems of ROI.

Required:

a.Define residual income and explain how it is calculated.
b.What are the shortcomings of residual income? Give an example of when ROI is
a better measure than residual income.
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Managerial Accounting

Managerial Accounting


Edition: 4th
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diana72gdiana72g
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A month ago
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More solutions for this book are available here
a.Residual income is the income that is earned above a specified minimum level of
return. As long as a project's residual income is positive, it is earning a return in excess of the corporate minimum. Residual income is calculated as operating income minus (average assets times the required minimum rate of return).

b.While residual income may appear to solve problems associated with ROI, it has its
own shortcomings. Because residual income is an absolute measure that is stated in absolute dollars, using it to compare divisions of different sizes is difficult. In comparing the performance of multiple units, ROI is a better performance measure than residual income, since it is a relative measure. In evaluating a single unit, however, residual income is the better measure of performance.

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sarasmith06 Author
wrote...

A month ago
I appreciate what you did here, answered it right Smiling Face with Open Mouth
Danivalda
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Yesterday
Smart ... Thanks!
prime7105
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2 hours ago
this is exactly what I needed
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