Answer (A) is correct . Residual income is income of an investment center, minus an imputed interest charge for invested capital. The theory is that earning an income greater than residual income indicates that expansion is desirable. However, comparisons of investment centers based on residual income may be misleading because of differences in products, markets, costs, and local conditions.
Answer (B) is incorrect because Use of the same imputed interest rate provides a consistent objective against which each investment can be measured.
Answer (C) is incorrect because Common amounts of invested capital would eliminate a major factor causing differences in residual income.
Answer (D) is incorrect because Comparisons of investment centers based on residual income may be misleading because of peculiarities of each investment center (i.e., differences in products, markets, costs, and local conditions).
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