Concept Introduction:
Cost center:
Cost center incurs costs and does not generate the revenue directlyInvestment Center:
Investment center takes care of revenue, cost and investment
Profit Center:
Profit center generate revenue and incur expenses
Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:
Or
To Indicate:
How return on investment helps in comparing the divisions of decentralized companies
Want to see the full answer?
Check out a sample textbook solutionChapter 14 Solutions
Survey of Accounting (Accounting I)
- What concept is critical in distinguishing an enterprise’s return on investment from return of its investment? Capital maintenance concept Current operating performance concept Comprehensive income concept Return on investment conceptarrow_forwardWhich of the following statements is NOT a benefit of return on investment (ROI) as a measure of the financial performance of divisions? a. It is a relative measure and allows divisions of different sizes to be compared b. The percentage calculated can be compared with the return required by investors. c. The performance of a division can be tracked over time (since a percentage is calculated). d. It can provide a disincentive to invest, or force the sale of assets, in order to better the return.arrow_forwardWhat is the fundamental flaw in utilizing income from operations as a success metric for investment centers?arrow_forward
- What is the primary disadvantage of utilizing revenue from operations to evaluate investment centers' performance?arrow_forwardWhat is the major shortcoming of using operating income as a performance measure for investment centers?arrow_forward(a) Explain how return on investment might lead a divisional manager to reject new investments that could be profitable for the company as a whole. (b) How can this disadvantage be overcome?arrow_forward
- Explain the benefits of a residual income structure within an investment center framework. It may help to think of an example using an existing company.arrow_forwardWhich of the following is a disadvantage of outsourcing? A. freeing up capacity B. freeing up capital C. transferring production and technology risks D. limiting ability to upsize or downsize productionarrow_forwardWhat is customer value? How is customer value related to a cost leadership strategy? To a differentiation strategy? To strategic positioning?arrow_forward
- What is meant by a products contribution margin ratio and how is this ratio useful in planning business operations?arrow_forwardIn a decentralized company in which the divisions are organized as investment centers, how could a dicision be considered the least profitable even though it earned the largest amount of income from operations?arrow_forwardWhat profit-based pricing approach should a manager use if he orshe wants to reflect the percentage of the firm’s resources used inobtaining the profit?arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Financial & Managerial AccountingAccountingISBN:9781337119207Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningAccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning