Reference: 12-02
the Following Data Are Available for the South

question 73

Multiple Choice

Reference: 12-02
The following data are available for the South Division of Redride Products, Inc. and the single product it makes: $$\begin{array} { | l | l | } \hline \text { Unit selling price } & \$ 20 \\\hline \text { Variable cost per unit } & \$ 12 \\\hline \text { Annual fixed costs } & \$ 280,000 \\\hline \text { Average operating assets } & \$ 1,500,000 \\\hline\end{array}$$
-Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?

• A)Residual income does not measure how effectively the division manager controls costs.
• B)Opportunities may be undertaken which will decrease the overall return on investment.
• C)The minimum required rate of return may eliminate desirable opportunities from consideration.
• D)This method does not make allowance for difference in the size of compared divisions.

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Definitions:

Investment Revenue

Investment revenue is income generated from various types of investments, including dividends from stocks, interest on bonds, or income from rental properties.

Equity Method

The equity method is an accounting technique used to record investments in other companies, typically reflecting the owning company's fair share of the investee's net income.

Cash Dividends

Payments made by a corporation to its shareholders, usually as a distribution of profits.

Investment Account

An account held at a financial institution that is used to hold securities, cash, and other investments in the financial markets.