Asked by Bailey Rayoum on Jun 17, 2024
Verified
Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income
Investment Center
A business segment or unit within an organization for which the manager has control and is responsible for its revenue, expenses, and the assets invested in the center.
Return On Investment
A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
Residual Income
The amount of income that exceeds the minimum target return, often used in performance measurement and managerial compensation.
- Evaluate the impact of investment decisions on a company's financial performance measures.
Verified Answer
KM
Katherine McKeownJun 22, 2024
Final Answer :
D
Explanation :
Residual income is the only measure of performance that encourages continued expansion by an investment center as long as it is able to earn a return in excess of the minimum required return on average operating assets. The other measures (return on investment, transfer pricing, and the contribution approach) do not take into consideration the opportunity cost of using resources to expand and may incentivize managers to reject profitable investment opportunities that do not meet arbitrary performance thresholds.
Learning Objectives
- Evaluate the impact of investment decisions on a company's financial performance measures.