Question

How can a residual income approach to performance evaluation reduce the likelihood of suboptimization?

A) By encouraging managers to focus on long-term goals
B) By promoting cost-cutting measures
C) By discouraging investment in profitable projects
D) By emphasizing short-term financial gains

Answer 1

A residual income approach to performance evaluation can reduce the likelihood of suboptimization by encouraging managers to focus on long-term goals.

Step-by-step explanation:

A residual income approach to performance evaluation can reduce the likelihood of suboptimization by encouraging managers to focus on long-term goals. Instead of solely emphasizing short-term financial gains, the residual income approach takes into account the economic value added by a project or division over time. This encourages managers to make decisions that are aligned with long-term profitability and sustainability.