Since Residual Income (RI) Is Not a Percentage, It Is

question 96

Multiple Choice

Since residual income (RI) is not a percentage, it is not very useful for:

• A) Comparing business units of significantly different size.
• B) Evaluating the performance of subunits with high ROIs.
• C) Motivating goal-congruent behavior on the part of divisional managers.
• D) Evaluating the short-term financial performance of small divisions.
• E) Evaluating the short-term financial performance of larger divisions.

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Definitions:

Gross Profit

Income from sales or services minus the cost of goods sold; it measures how efficiently a company uses labor and supplies in production.

Cost Of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor, used to determine gross profit.

Operating Expenses

Expenses incurred in the normal operation of a business, including costs such as rent, utilities, and payroll, that do not directly relate to the production of goods or services.

Profit Center

A profit center is a branch or division of a company that is directly responsible for generating its own revenue and profit.