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Hi John!
When measuring performance of a division using residual income:
– Can we can that a positive residual income is enough to say that a division has performed well?– My issue about this is that in ROI, we have a target which we can compare and judge the performance. But for RI, there is no target. Therefore, is having a positive RI enough to say that the division has performed well?
RI does have a target – the target is the rate of interest used to calculate the notional interest. So if the RI is positive then they have ‘beaten’ the target and on this measure have done OK.
As to whether they have done well or not depends on how the company decides to use the measure. Usually they will want the RI to be higher than it was in the previous year. (Just as with ROI that although they will want it to be higher than the target, they will also usually want it to be better than it was in the previous year.)
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