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.

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