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

question 19

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 take into account differences in the size of divisions.
• B) investments may be adopted that will decrease the overall return on investment.
• C) the minimum required rate of return may eliminate desirable investments.
• D) residual income does not measure how effectively the division manager controls costs.

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Definitions:

Socially Desirable

Refers to actions or policies that are widely accepted and promoted by society because they are considered beneficial for the majority of its members.

Efficient

An attribute of systems, processes, or devices that use the least amount of inputs to achieve the highest amount of output or desired effect.

MSB

Marginal Social Benefit, referring to the additional benefit to society as a whole from consuming one more unit of a good.

MSC

MSC, or Marginal Social Cost, is the total cost to society of producing one additional unit of a good or service, including both private costs and externalities.