Final answer:
RI reflects a dollar amount of profit after accounting for the opportunity cost of capital employed and is not influenced by the investment size, aligning managerial decisions with overall profitability of the company.
Step-by-step explanation:
The advantages of using residual income (RI) rather than Return on Investment (ROI) for evaluating business-unit financial performance include that RI reflects a dollar amount and is not influenced by the size of the investment. RI takes into account the cost of capital and provides an absolute dollar value, which is the profit remaining after subtracting a charge for the opportunity cost of the capital employed. This charge represents the minimum acceptable return on the investment, based on the company's cost of capital or required rate of return. Therefore, unlike ROI which looks at investment efficiency relative to the size of investment, RI measures the absolute amount of profits that exceed the opportunity cost. This means that RI encourages managers to pursue any project that would generate a positive absolute return over the cost of capital, fostering decisions that are likely to aim for overall profitability improvement.