Deck 11: Performance Measurement in Decentralized Organizations

Question 1

Return on investment (ROI) equals margin multiplied by sales.

Answer 1

False

Question 2

When used in return on investment (ROI) calculations, turnover equals sales divided by average operating assets.

Answer 2

True

Question 3

A manufacturing cycle efficiency (MCE) ratio of less than 1.00 is desirable because this is the ratio of non-value-added time to throughput time.

Answer 3

False

Question 4

Throughput time is the amount of time required to move a completed unit from the factory floor to the warehouse.

Question 5

If the MCE is equal to 0.6, then 60% of the time a unit is in process is spent on activities that add value to the product.

Question 6

The use of return on investment (ROI) as a performance measure may lead managers to reject a project that would be favorable for the company as a whole.

Question 7

An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.

Question 8

A manufacturing cycle efficiency (MCE) of less than one is impossible.

Question 9

Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI).

Question 10

A manager would generally like to see a trend indicating a decrease in setup time.

Question 11

Residual income can be used most effectively in comparing the performance of divisions of different size.

Question 12

Net operating income is income before interest and taxes.

Question 13

Residual income should be used to evaluate an investment center rather than a cost or profit center.

Question 14

Residual income is the difference between net operating income and the product of average operating assets and the minimum rate of return.

Question 15

All other things the same, an increase in unit sales will normally result in an increase in the return on investment.

Question 16

ROI and residual income are tools used to evaluate managerial performance in investment centers.

Question 17

If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions.

Question 18

Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.

Question 19

A change in sales has no effect on margin and turnover.

Question 20

Move time is considered non-value-added time.

Question 21

Inspection Time is generally considered to be value-added time.

Question 22

If the balanced scorecard is correctly constructed, the performance measures should be independent of each other so that bad performance on one measure will not result in bad performance on another performance measure.

Question 23

Under a responsibility accounting system, fewer expenses are charged against managers the higher one moves upward in an organization.

Question 24

A profit center is responsible for generating revenue, but it is not responsible for controlling costs.

Question 25

A cost center is a responsibility center.

Question 26

In essence, a balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes. The strategy should seem plausible, but it should be regarded as only a theory.

Question 27

Financial measures such as ROI and residual income as well as operating measures may be included in a balanced scorecard.

Question 28

If improvement in a performance measure on a balanced scorecard should lead to improvement in another performance measure, but does not, then employees must work harder.

Question 29

Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same?

A) A reduction in expenses.
B) An increase in net operating income.
C) An increase in operating assets.
D) An increase in sales.

Question 30

A balanced scorecard consists of a report showing a performance measure such as ROI or residual income for all of the divisions in a company that generate profits.

Question 31

The performance measures on a balanced scorecard tend to fall into four groups: financial measures, customer measures, internal business process measures, and learning and growth measures.

Question 32

If a strategy is not working, it should become evident on the balanced scorecard when some of the predicted effects don't occur.

Question 33

Financial measures tend to be lag indicators that report on the results of past actions.

Question 34

Incentive compensation for employees, such as bonuses, should be tied to balanced scorecard performance measures only if managers are confident that the performance measures are easily manipulated by those being evaluated.

Question 35

Which of the following would be an argument for using the gross cost of plant and equipment as part of operating assets in return on investment computations?

A) It is consistent with the computation of net operating income, which includes depreciation as an operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse effect on ROI.

Question 36

A balanced scorecard contains both customer and internal business process performance measures because improvements in internal business process should result in improvements in customer satisfaction.

Question 37

Queue time is considered non-value-added time.

Question 38

Financial measures such as ROI are generally better than nonfinancial measures of key success drivers such as customer satisfaction as leading indicators of future financial performance.

Question 39

The basic objective of responsibility accounting is to charge each manager with those costs and/or revenues over which he has control.

Question 40

Which of the following would not be included in operating assets in return on investment calculations?

A) Cash.
B) Accounts Receivable.
C) Equipment
D) Factory building rented to (and occupied by) another company.

Question 41

A segment of a business responsible for both revenues and expenses would be called:

A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.

Question 42

Which of the following measures of performance encourages continued expansion by an investment center so long as it is able to earn a return in excess of the minimum required return on average operating assets?

A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income

Question 43

Given the following data: $\begin{array}{lc}\text { Average operating assets } & \$125,000 \\\text { Total liabilities } & \$ 50,000\\\text { Sales } & \$300,000 \\\text { Contribution margin } & \$75,000 \\\text { Net operating income } & \$15,000\end{array}$ Return on investment (ROI) is:

A) 30%
B) 5%
C) 20%
D) 12%

Question 44

Tennill Inc. has a $1,400,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 4,480,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 1,657,600\end{array}$ The ROI for this year's investment opportunity considered alone is closest to:

A) 8.1%
B) 128.0%
C) 3.0%
D) 9.6%

Question 45

Which of the following will increase a company's manufacturing cycle efficiency (MCE)? $\begin{array} { l l l } &\text { Decrease in Inspection Time } & \text { Decrease in Queue Time }\\\text { A) } & \text { Yes } & \text { Yes } \\ \text { B) } & \text { Yes } & \text { No } \\ \text { C) } & \text { No } & \text { Yes } \\ \text { D) } & \text { No } & \text { No } \end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 46

Runyon Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 16,800,000 \\\text { Variable expenses } & 12,230,000 \\\text { Contribution margin } & 4,570,000 \\\text { Fixed expenses } & 3,394,000 \\\text { Net operating income } & \$ 1,176,000 \\\end{array}$ The company's average operating assets were $7,000,000.
Last year's turnover was closest to:

A) 0.42
B) 14.29
C) 0.07
D) 2.40

Question 47

All other things equal, which of the following would increase a division's residual income?

A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.

Question 48

Leete Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 14,000,000 \\\text { Variable expenses } & 9,660,000 \\\text { Contribution margin } & 4,340,000 \\\text { Fixed expenses } & 2,940,000 \\\text { Net operating income } & \$ 1,400,000 \\\end{array}$ Last year's margin was closest to:

A) 79.0%
B) 31.0%
C) 20.0%
D) 10.0%

Question 49

Chiodini Inc. has a $900,000 investment opportunity that involves sales of $2,430,000, fixed expenses of $1,044,900, and a contribution margin ratio of 50% of sales. The ROI for this year's investment opportunity considered alone is closest to:

A) 16.3%
B) 18.9%
C) 7.0%
D) 135.0%

Question 50

Youns Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 10,500,000 \\\text { Variable expenses } & 6,610,000 \\\text { Contribution margin } & 3,890,000 \\\text { Fixed expenses } & 3,260,000 \\\text { Net operating income } & \$ \quad 630,000 \\\end{array}$ The company's average operating assets were $5,000,000.
At the beginning of this year, the company has a $1,400,000 investment opportunity that involves sales of $2,800,000, fixed expenses of $616,000, and a contribution margin ratio of 30% of sales.
If the company pursues the investment opportunity and otherwise performs the same as last year, the combined turnover for the entire company will be closest to:

A) 9.50
B) 1.64
C) 2.66
D) 2.08

Question 51

BR Company has a contribution margin of 40%. Sales are $312,500, net operating income is $25,000, and average operating assets are $200,000. What is the company's return on investment (ROI)?

A) 12.5%
B) 62.5%
C) 8.0%
D) 64.0%

Question 52

Anguiano Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 10,500,000 \\\text { Variable expenses } & 8,210,000 \\\text { Contribution margin } & 2,290,000 \\\text { Fixed expenses } & 1,555,000 \\\text { Net operating income } & \$ \quad 735,000 \\\end{array}$ The company's average operating assets were $5,000,000.
Last year's return on investment (ROI) was closest to:

A) 7.0%
B) 14.7%
C) 45.8%
D) 47.6%

Question 53

Nasser Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 1,600,000 \\\text { Variable expenses } & 7,760,000 \\\text { Contribution margin } & 4,840,000 \\\text { Fixed expenses } & 3,706,000 \\\text { Net operating income } & \$ 1,134,000 \\\text { Average operating assets } & \$ 16,000,000\end{array}$ Last year's return on investment (ROI) was closest to:

A) 9.0%
B) 47.6%
C) 18.9%
D) 80.7%

Question 54

Cirone Inc. reported the following results from last year's operations: $\begin{array}{lrr}\text { Sales } & \$ 9,600,000 \\\text { Variable expenses } & 6,810,000 \\\text { Contribution margin } & 2,790,000 \\\text { Fixed expenses } & 1,926,000 \\\text { Net operating income } & \$ 864,000 \\\text { Average operating assets } & \$ 4,000,000\end{array}$ At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:
$\begin{array}{lc}\text { Sales } & \$4,200,000 \\\text { Contribution margin ratio } & 30 \% \text { of sales } \\\text { Fixed expenses } & \$ 966,000\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined margin for the entire company will be closest to:

A) 3.1%
B) 8.4%
C) 6.3%
D) 12.1%

Question 55

Some investment opportunities that should be accepted from the viewpoint of the entire company may be rejected by a manager who is evaluated on the basis of:

A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.

Question 56

Selma Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 13,800,000 \\\text { Variable expenses } & 9,950,000 \\\text { Contribution margin } & 3,850,000 \\\text { Fixed expenses } & 3,022,000 \\\text { Net operating income } & \$828,000 \\\text { Average operating assets } & \$ 6,000,000 \\\end{array}$ Last year's margin was closest to:

A) 78.1%
B) 6.0%
C) 13.8%
D) 27.9%

Question 57

Which of the following would be considered an operating asset in return on investment computations?

A) Land being held for plant expansion.
B) Treasury stock.
C) Accounts receivable.
D) Common stock.

Question 58

Othman Inc. has a $800,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 2,240,000 \\\text { Contribution margin ratio } & 50 \% \text { of sales } \\\text { Fixed expenses } & \$ 1,008,000\end{array}$ The margin for this investment opportunity is closest to:

A) 50.0%
B) 45.0%
C) 5.0%
D) 55.0%

Question 59

Which of the following performance measures will increase if inventory decreases and all else remains the same? $\begin{array} { l l l } & \text { Return on Investment}& \text {Residual Income }\\\text { A) } & \text { Yes } & \text { Yes } \\ \text { B) } & \text { No } & \text { Yes } \\ \text { C) } & \text { Yes } & \text { No } \\ \text { D) } & \text { No } & \text { No } \end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 60

Which of the following segment performance measures will decrease if there is an increase in the interest expense for that segment? $\begin{array} { l l l } & \text { Return on Investment}& \text {Residual Income }\\\text { A) } & \text { Yes } & \text { Yes } \\ \text { B) } & \text { No } & \text { Yes } \\ \text { C) } & \text { Yes } & \text { No } \\ \text { D) } & \text { No } & \text { No } \end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 61

Tadman Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$, 400,000 \\\text { Variable expenses } & 5,120,000 \\\text { Contribution margin } & 3,280,000 \\\text { Fixed expenses } & 2,944,000 \\\text { Net operating income } & \$ \quad 336,000 \\\end{array}$ At the beginning of this year, the company has a $800,000 investment opportunity that involves sales of $2,800,000, fixed expenses of $756,000, and a contribution margin ratio of 30% of sales.
If the company pursues the investment opportunity and otherwise performs the same as last year, the combined margin for the entire company will be closest to:

A) 1.0%
B) 3.0%
C) 5.0%
D) 3.8%

Question 62

Worsell Inc. reported the following results from last year's operations: The company's minimum required rate of return is 10%. Last year's residual income was closest to:

A) $440,000
B) $490,000
C) ($638,000)
D) ($60,000)

Question 63

Verbeke Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$, 300,000 \\\text { Variable expenses } & 3,890,000 \\\text { Contribution margin } & 2,410,000 \\\text { Fixed expenses } & 2,032,000\\\text { Net operating income }& \$ 378,000 \\\text { Average operating assets }& \$ 3,000,000\end{array}$ Last year's turnover was closest to:

A) 16.67
B) 0.06
C) 2.10
D) 0.48

Question 64

Braymiller Inc. has a $1,600,000 investment opportunity with the following characteristics: $\begin{array}{lc}\text { Sales } & \$ 4,000,000 \\\text { Contribution margin ratio } & 30 \% \text { of sales } \\\text { Fixed expenses } & \$ 1,040,000\end{array}$ The turnover for this investment opportunity is closest to:

A) 0.04
B) 0.40
C) 2.50
D) 25.00

Question 65

Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

A) ($31,500)
B) $0
C) $94,500
D) $124,600

Question 66

Salvey Inc. reported the following results from last year's operations: The company's average operating assets were $3,000,000.
At the beginning of this year, the company has a $300,000 investment opportunity that involves sales of $480,000, fixed expenses of $100,800, and a contribution margin ratio of 30% of sales.
If the company pursues the investment opportunity and otherwise performs the same as last year, the combined ROI for the entire company will be closest to:

A) 16.6%
B) 1.3%
C) 18.2%
D) 15.3%

Question 67

Lumsden Inc. has a $1,200,000 investment opportunity with the following characteristics: The company's minimum required rate of return is 7%. The residual income for this year's investment opportunity is closest to:

A) $120,000
B) $36,000
C) $0
D) $84,000

Question 68

Mike Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's residual income in January?

A) $7,900
B) ($20,118)
C) $20,118
D) ($7,900)

Question 69

Boespflug Inc. has a $1,000,000 investment opportunity that involves sales of $900,000, fixed expenses of $225,000, and a contribution margin ratio of 30% of sales. The margin for this investment opportunity is closest to:

A) 5.0%
B) 25.0%
C) 75.0%
D) 30.0%

Question 70

Canedo Inc. reported the following results from last year's operations: $\begin{array}{lrr}\text { Sales } & \$ 9,600,000 \\\text { Variable expenses } & 7,170,000 \\\text { Contribution margin } & 2,430,000 \\\text { Fixed expenses } & 1,470,000 \\\text { Net operating income } & \$ 960,000 \\\text { Average operating assets } & \$ \quad 4,000,000\end{array}$ At the beginning of this year, the company has a $700,000 investment opportunity with the following characteristics:
$\begin{array}{lc}\text { Sales } & \$ 2,310,000 \\\text { Contribution margin ratio } & 60 \% \text { of sales } \\\text { Fixed expenses } & \$ 1,201,200\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined turnover for the entire company will be closest to:

A) 2.98
B) 17.01
C) 2.53
D) 2.04

Question 71

Largo Company recorded for the past year sales of $750,000 and average operating assets of $375,000. What is the margin that Largo Company needed to earn in order to achieve an ROI of 15%?

A) 2.00%
B) 15.00%
C) 9.99%
D) 7.50%

Question 72

The following information relates to last year's operations at the Legumes Division of Gervani Corporation: $\begin{array}{lc}\text { Minimum required rate of return } & 12 \% \\\text { Return on investment (ROI) } & 15 \% \\\text { Sales } & \$ 900,0000 \\\text { Turnover (on operating assets) } & 3 \text { times }\end{array}$ What was the Legume Division's net operating income last year?

A) $108,000
B) $135,000
C) $36,000
D) $45,000

Question 73

In November, the Universal Solutions Division of Keaffaber Corporation had average operating assets of $480,000 and net operating income of $46,200. The company uses residual income, with a minimum required rate of return of 11%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in November?

A) ($6,600)
B) $5,082
C) $6,600
D) ($5,082)

Question 74

The following data has been provided for a company's most recent year of operations: The residual income for the year was closest to:

A) $20,000
B) $3,000
C) $5,000
D) $15,000

Question 75

Chavin Company had the following results during August: net operating income, $220,000; turnover, 5; and ROI 25%. Chavin Company's average operating assets were:

A) $880,000
B) $44,000
C) $55,000
D) $1,100,000

Question 76

Last year a company had sales of $600,000, a turnover of 3.6, and a return on investment of 18%. The company's net operating income for the year was:

A) $166,667
B) $108,000
C) $30,000
D) $15,000

Question 77

Condren Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 12,000,000 \\\text { Variable expenses } & 7,680,000 \\\text { Contribution margin } & 4,320,000 \\\text { Fixed expenses } & 3,720,000 \\\text { Net operating income } & \$ 600,000 \\\text { Average operating assets } & \$ 6,000,000 \\\end{array}$ At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics:
$\begin{array}{lc}\text { Sales } & \$ 1,100,000 \\\text { Contribution margin ratio } & 40 \% \text { of sales } \\\text { Fixed expenses } & \$ 363,000\end{array}$ If the company pursues the investment opportunity and otherwise performs the same as last year, the combined ROI for the entire company will be closest to:

A) 1.1%
B) 8.6%
C) 9.7%
D) 11.3%

Question 78

Bungert Inc. reported the following results from last year's operations: $\begin{array}{lr}\text { Sales } & \$ 15,200,000 \\\text { Variable expenses } & 9,470,000 \\\text { Contribution margin } & 5,730,000 \\\text { Fixed expenses } & 4,818,000 \\\text { Net operating income } & \$ \quad 912,000 \\\end{array}$ The company's minimum required rate of return is 12% and its average operating assets were $8,000,000. Last year's residual income was closest to:

A) $912,000
B) ($48,000)
C) $992,000
D) ($972,800)

Question 79

Tallon Inc. has a $1,200,000 investment opportunity that involves sales of $1,680,000, fixed expenses of $336,000, and a contribution margin ratio of 30% of sales. The turnover for this investment opportunity is closest to:

A) 1.40
B) 0.10
C) 10.00
D) 0.71

Question 80

If net operating income is $70,000, average operating assets are $250,000, and the minimum required rate of return is 16%, what is the residual income?

A) $11,200
B) $40,000
C) $110,000
D) $30,000