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Question(s) / Instruction(s):

A company 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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