ACCA Applied Skills · Performance Management · Divisional performance and transfer pricing
Which is a recognised disadvantage of using ROI rather than residual income to assess divisional managers?
ROI may lead managers to reject projects earning more than the cost of capital. A division with a high existing ROI avoids projects that would dilute its percentage, even though they would add value to the group, so decisions become goal incongruent.
- AIt may cause managers to reject projects that earn above the cost of capitalCorrect
- BIt ignores profit entirely
- CIt always produces absolute dollar figures
- DIt requires an imputed interest charge
Explanation
ROI is a percentage, so a manager with a high ROI may reject a project whose return is below the current ROI but above the cost of capital. That harms the group. ROI does use profit, gives a percentage, and needs no imputed interest charge; RI does.
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