Delmar Corporation Is Considering the Use of Residual Income as a Measure

question 169

Multiple Choice

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

Analyze the effect of healthcare spending on a nation's economy.

Distinguish between the economic growth rates of developed and less developed countries (LDCs).

Understand the concept of Baumol's Disease and its implications for the service sector.

Examine the role of technology and innovation in economic development.

---

Definitions:

Average Variable Cost

The total variable cost divided by the quantity of output produced, indicating the variable cost of producing each unit.

Total Fixed Cost

Total Fixed Cost is the sum of all costs required to produce a product or service that does not change with the volume of output, such as rent, salaries, and equipment maintenance.

Profit-Maximizing Output

The point of production where a company reaches its maximum profit occurs when the marginal revenue is equal to the marginal cost.

Profit-Maximizing Output

The peak production level where a company can attain its maximum profit potential.