Return on investment

Definition

Return on Investment (ROI) measures the profitability of an investment by comparing the net profit to the initial cost. It is a key performance indicator used to assess how efficiently financial resources are being utilized within responsibility centers.

5 Must Know Facts For Your Next Test

1. ROI is calculated by dividing Net Profit by Total Investment Cost and multiplying by 100 to get a percentage.
2. A higher ROI indicates a more profitable or efficient investment.
3. ROI can be used to compare the effectiveness of different responsibility centers within an organization.
4. Responsibility centers with high ROIs are often given more autonomy and resources as they demonstrate better financial performance.
5. Decentralized organizations use ROI to evaluate the performance of individual managers or departments.

Review Questions

• How do you calculate Return on Investment (ROI)?
• Why is ROI important in evaluating responsibility centers?
• What does a higher ROI indicate about a responsibility center's performance?

Related terms

Net Profit: The amount remaining after all expenses have been deducted from total revenue.

Responsibility Center:

A segment of an organization for which a particular manager is responsible.

Decentralization:

The delegation of decision-making authority to lower levels in an organization's hierarchy.