The Role of Profitability in Divisional Decision Making and Performance Evaluation

The use of profitability, typically in the form of return on investment, to assess divisional financial performance has been widely criticised, since it involves the allocation to divisions of central fixed costs. The measure is, however, extensively used. Prior surveys have indicated economic reasons for use of the measure, but the justification supplied has been incomplete. The survey reported in this paper found evidence for the same economic reasons, but it has also provided additional justification. The new finding is that the measure is widely used for making inter-division and inter-firm comparisons.