Question

The residual income approach is sometimes used to avoid ____________________, which occurs when managers choose to reject investment projects that would benefit their company's ROI but would reduce their investment center's ROI.

A) Budget constraints
B) Cost variances
C) ROI myopia
D) Residual losses

Answer 1

The residual income approach helps avoid ROI myopia, a situation where managers reject beneficial projects due to the focus on immediate ROI improvement instead of long-term gains.

Step-by-step explanation:

The residual income approach is sometimes used to avoid ROI myopia, which occurs when managers choose to reject investment projects that would benefit their company's ROI but would reduce their investment center's ROI. ROI myopia refers to the short-sightedness of focusing solely on immediate improvements to ROI at the expense of longer-term benefits. This approach helps address the issues associated with sunk costs, which are past costs that are no longer recoverable and should not impact current decision making. In contrast, the residual income method encourages considering the future benefits of an investment, rather than just the impact on immediate financial ratios.