Economics · Divisional Performance Evaluation
Which of the following statements best describes the primary behavioral advantage of using Residual Income (RI) instead of Return on Investment (ROI) for evaluating divisional performance?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1RI aligns corporate goal congruence by concentrating exclusively on controllable fixed overheads rather than overall capital assets.
- 2RI encourages divisional managers to adopt viable, profitable investments that might otherwise lower the division's cumulative ROI.✓
- 3RI is a relative percentage metric, enabling direct comparisons between divisions of significantly differing scales.
- 4RI is simpler to compute because it completely excludes the cost of capital, lowering subjectivity.
Correct answer
RI encourages divisional managers to adopt viable, profitable investments that might otherwise lower the division's cumulative ROI.
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