Residual Income Analysis: A Method of Inventory Investment Allocation and Evaluation

Abstract

A residual income analysis (RIA) approach for planning and evaluating the efficacy of merchandising decisions is developed in this paper. This approach is an improvement on the familiar and popular gross margin return on investment (GMROI) criterion, since it rectifies the weaknesses while retaining the strengths inherent in the latter. The applications of RIA for allocating funds and for evaluating merchandising decisions are discussed and illustrated.