In a decentralized organization, Co. X, Division A isevaluated according to ROI, while Division B is evaluatedaccording to residual income. Of Co.X, Div. A and Div.B, whichis more likely to make an investment decision that will hurt Co.X's income?a. Co. Xb. Division A d. All are equally likely to do this9.c. Division B10. Division A, an investment center, has operating income =$80,000 for the prior period. The residual income during thisperiod is $20,000. If Division A’s investment assets = $300,000,then cost of capital set by the corporation's top managementmust be:a. 12%|c.20%b. 15% d. 25%11.A division manager is considering investing in a newproduct. The division's income is currently $465,000 withoperating assets of $8 million. The new product would increaseincome by $270,000 and would require an additional investmentin equipment of $1.5 million. The ROI of the division beforeand after the investment is respectively:a. 5.8% and 7.7%c. 7.7% and 5.8%b. 11.6% and 15.8%|d. Cannot determine

I am answering the first question as per company's policy Residual income is the income earned by…

In a decentralized organization, Co. X, Division A is evaluated according to ROI, while Division B is evaluated according to residual income. Of Co.X, Div. A and Div.B, which is more likely to make an investment decision that will hurt Co. 9. X's income? a. Co. X c. Division B b. Division A d. All are equally likely to do this

In a decentralized organization, Co. X, Division A is evaluated according to ROI, while Division B is evaluated according to residual income. Of Co.X, Div. A and Div.B, which is more likely to make an investment decision that will hurt Co. 9. X's income? a. Co. X c. Division B b. Division A d. All are equally likely to do this

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division. True False
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Please describe a significant disadvantage of utilizing income from operations as a performance indicator for investment centers.
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Please explain a major shortcoming of using income from operations as a performance measure for investment centers.