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
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Survey of Accounting (Accounting I)
- How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forwardHow does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forwardWhat 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_forward
- Differentiate between centralized and decentralized operations. In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations?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
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