Question

A company may prefer to use residual income over return on investment for performance evaluation because ________.

A) residual income is a ratio but return on investment is an absolute figure
B) residual income is more likely to lead to goal congruence than return on investment is
C) residual income is easier to calculate than return on investment
D) residual income considers three elements but return on investment considers only two elements

Answer 1

A company may prefer to use residual income over return on investment for performance evaluation because Residual income is more likely to lead to goal congruence than return on investment is.

Thus the correct option is B.

Step-by-step explanation:

A company may prefer to use residual income over return on investment (ROI) for performance evaluation because residual income is more likely to lead to goal congruence. Goal congruence refers to the alignment of the goals of the management with the goals of the overall organization.

Residual income considers the minimum required rate of return, ensuring that projects or divisions generate excess income above the required return. This encourages managers to make decisions that are in the best interest of the overall company. On the other hand, ROI, being an absolute figure, may incentivize managers to undertake projects with a high ROI even if they do not contribute to the long-term goals of the organization.

Using residual income promotes a focus on creating value for the company as a whole, contributing to better decision-making and goal alignment within the organization.Thus the correct option is B.