Accounting · Management Accounting
What is the most significant potential drawback of utilizing Return on Investment (ROI) as a standalone divisional performance measure?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1It inherently leads to an intentional misrepresentation of total shareholder wealth.
- 2It can lead to sub-optimal, dysfunctional decision-making where profitable projects for the company are rejected by divisional managers.✓
- 3It forces upper management to focus exclusively on top-line sales growth.
- 4It presents difficulties in computing the precise external cost of capital.
Correct answer
It can lead to sub-optimal, dysfunctional decision-making where profitable projects for the company are rejected by divisional managers.
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