Question

Which one of the following is a distinguishing charactertisitc of an investment center?

A) performance can be evaluated with both profitability and return on utilizing assets

B) It includes significant uncontrollable fixed costs

C) This type of responsbility center only generates revenues

D) Revenues are rarely generated by selling products

Answer 1

In an investment center, costs, revenue and assets are identified seperately. An investment center would usually be a subsidiary company or a division. One can classify an investment center as an extension of the profit center where revenues and expenses are measured.

Instead of looking at how much profit or expenses a unit has, the investment center focuses on generating returns on the fixed assets or working capital invested specifically in the investment center.

In simpler terms, the performance of a department is analysed by examining the assets and resources given to the department and how well it used those assets to generate revenue compared with its overall expenses.

By focusing on return on capitlal, the investment center philosophy gives a more accurate picture of how much a division is contributing to the economic well-being of the company. Using this approach of measuring a department's performance, managers have insight as to whether to increase capital to increase profits or whether to shut down a department that is ineffectively making use of its invested capital.

On the basis of above points, option (A) is appropriate