A Disadvantage of Evaluating Managers' Performance Based on ROI Is

question 158

Essay

A disadvantage of evaluating managers' performance based on ROI is that it can lead to undesirable managerial actions.Residual income can overcome many of the problems of ROI.
Required:
a.Define residual income and explain how it is calculated.
b.What are the shortcomings of residual income? Give an example of when ROI is a better measure than residual income.

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Definitions:

One-Time Added Profit

Profit earned from a unique, non-recurring transaction or event.

Profit-Maximizing Firm

A company that operates in such a way as to maximize its profits by determining the best levels of production and pricing.

Interest-Rate Cost of Funds

The expense associated with borrowing money, typically represented as a percentage of the total amount borrowed.

Corporate Decision

Strategic choices made by a company’s management that influence its operations, finances, and overall business direction.