Deck 14: Business Unit Performance Measurement

Question 1

In general,a division's investment base includes an allocated share of the corporate headquarters' assets.

Answer 1

False

Question 2

A problem with ratio-based measures is that managers can make decisions that improve divisional income but lower total organizational income.

Answer 2

True

Question 3

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

Answer 3

True

Question 4

Residual income is the difference between the divisional income and the cost of invested capital required to operate the division.

Question 5

One problem with economic value added (EVA)adjustments is determining the appropriate life for expenditures that benefit multiple periods

Question 6

It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI.

Question 7

In general,it is better to have a higher return on investment (ROI)than a lower one.

Question 8

The use of residual income reduces,but does not eliminate,the suboptimization problem.

Question 9

Using net book values instead of gross book values to compute return on investment (ROI)might encourage an investment center manager to delay replacing inefficient assets until they are fully depreciated.

Question 10

Divisional income statements do not have to follow generally accepted accounting principles (GAAP)because they are internal reports.

Question 11

The profit margin ratio is computed by dividing after-tax operating income by sales.

Question 12

Most organizations use residual income instead of return on investment (ROI)as a performance measure.

Question 13

Current costs should not be used to compute either return on investment (ROI)or residual income because current costs are not generally accepted accounting principles (GAAP).

Question 14

One problem associated with using accounting measures to evaluate divisional performance is the measures are based on historical information.

Question 15

Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.

Question 16

Like return on investment (ROI),economic value added (EVA)adjustments fail to sufficiently address the sub-optimization problem.

Question 17

One advantage of using after-tax income as a performance measure of divisional results is that it is a financial accounting measure that can also be used to compute organizational income.

Question 18

Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance.

Question 19

One disadvantage of using after-tax income as a performance measure of divisional results is that it is an absolute measure which makes it difficult to compare divisions of significantly different sizes

Question 20

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Question 21

After-tax income divided by sales is called the:

A) gross margin ratio.
B) profit margin ratio.
C) operating margin ratio.
D) contribution margin ratio.

Question 22

The following information is available for Sweet Dreams Company:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 100,000 \\\hline \text { Operating expenses } & \$ 94,000 \\\hline \text { Operating assets } & \$ 40,000 \\\hline \text { Stockholder's equity } & \$ 25,000 \\\hline \text { Cost of capital } & 10 \% \\\hline\end{array}$$ What is Sweet Dreams Company's return on investment (ROI)?

A) 6.0%.
B) 10.0%.
C) 15.0%.
D) 24.0%.

Question 23

Which of the following is not an advantage of after-tax income as a performance measure?

A) It reflects the results of decisions under the division manager's control.
B) It summarizes the results of decisions affecting revenues and costs.
C) It makes comparison of divisions easy because they use the same measure,dollars of income.
D) Financial accounting income at the divisional level is computed differently from that of the income for the firm.

Question 24

The following information was presented by Shower Wonder Enterprises for an asset purchased at the beginning of the previous year. $$\begin{array} { | l | r | } \hline \text { Original cost of the asset } & \$ 20,000 \\\hline \text { Useful life of the asset } & 10 \text { years } \\\hline \text { Cashflow annual operating protit } & \$ 4,000 \\\hline \text { Sabage value } & \$ - 0 - \\\hline\end{array}$$ What is the return on investment (ROI)assuming Shower Wonder (a)uses the straight-line method for depreciation and (b)average net book values to compute ROI?

A) 21.1%.
B) 20.0%.
C) 22.2%.
D) 11.76%.

Question 25

The Maxim Corporation reported the following operating results for its three divisions: South,West,and East. $$\begin{array} { | l | r | r | r | } \hline & \begin{array} { r } \text { South } \\\text { Division }\end{array} & \begin{array} { r } \text { West } \\\text { Division }\end{array} & \begin{array} { r } \text { East } \\\text { Division }\end{array} \\\hline \text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\hline \begin{array} { l } \text { Operating } \\\text { profits }\end{array} & \$ 20,000 & \$ 50,000 & \$ 100,000 \\\hline \begin{array} { l } \text { Dwisional } \\\text { assets }\end{array} & \$ 200,000 & \$ 625,000 & \$ 800,000 \\\hline\end{array}$$ Which division's profit margin is the highest?

A) South.
B) West.
C) East.
D) All three divisions are the same.

Question 26

Return on investment (ROI)can be decomposed into the asset turnover and the:

A) gross margin ratio.
B) profit margin ratio.
C) operating margin ratio.
D) contribution margin ratio.

Question 27

The following information was presented by Outdoors Manufacturing Company for an asset purchased at the end of the previous year. $$\begin{array} { | l | r | } \hline \text { Original cost of the asset } & \$ 20,000 \\\hline \text { Useful life of the asset } & 10 \text { years } \\\hline \text { Cashflow annual operating protit } & \$ 4,000 \\\hline \text { Sabage value } & \$ - 0 - \\\hline\end{array}$$ What is the return on investment (ROI)assuming Outdoors (a)uses the straight-line method for depreciation and (b)beginning-of-year net book values to compute ROI?

A) 11.1%.
B) 20.0%.
C) 10.0%.
D) 22.2%.

Question 28

Garage Corporation's return on investment (ROI)on some new equipment was 20% using beginning-of-year net book value.The gross book value of the equipment is $250,000.Accumulated depreciation at the beginning of the year was $10,000.This represents one-half year's straight-line depreciation.What is the annual before-tax cash flow from the new equipment?

A) $68,000.
B) $60,000.
C) $48,000.
D) $20,000.

Question 29

The Nacho Division of the Tex-Mex Company has a return on investment (ROI)of 12%,sales of $200,000,and an asset turnover of 2.0.What was Nacho's operating income?

A) $6,000.
B) $12,000.
C) $24,000.
D) $48,000.

Question 30

Which of the following statements does not represent a limitation of using return on investment (ROI)for measuring and evaluating performance?

A) ROI uses accounting income which is based on historical costs.
B) ROI cannot be used to compare divisions of different sizes.
C) ROI has the potential to create goal congruence problems.
D) ROI fails to align some costs incurred in one period with the benefits received in another perioD.
ROI can be used to compare different sized divisions-this is an advantage of ROI.

Question 31

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the:

A) gross margin ratio.
B) profit margin ratio.
C) operating margin ratio.
D) contribution margin ratio.

Question 32

The asset turnover is a measure (ratio)of an investment center's ability to:

A) earn profits.
B) generate sales.
C) control costs.
D) remain solvent.

Question 33

The Maxim Corporation reported the following operating results for its three divisions: South,West,and East. $$\begin{array} { | l | r | r | r | } \hline & \begin{array} { r } \text { South } \\\text { Division }\end{array} & \begin{array} { r } \text { West } \\\text { Division }\end{array} & \begin{array} { r } \text { East } \\\text { Division }\end{array} \\\hline \text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\hline \begin{array} { l } \text { Operating } \\\text { profits }\end{array} & \$ 20,000 & \$ 50,000 & \$ 100,000 \\\hline \begin{array} { l } \text { Dwisional } \\\text { assets }\end{array} & \$ 200,000 & \$ 625,000 & \$ 800,000 \\\hline\end{array}$$ Which division has the largest asset turnover?

A) South.
B) West.
C) East.
D) All three divisions are the same.

Question 34

Madrigal Corporation purchased a new machine for $120,000.The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI)of 15%.ROI is computed using annual cash flows and straight-line depreciation.What is the annual cash flow using the gross book value method?

A) $12,200.
B) $18,000.
C) $28,200.
D) $30,000.

Question 35

The following information was presented by User-Friendly Industries Company for an asset purchased at the end of the previous year. $$\begin{array} { | l | r | } \hline \text { Original cost of the asset } & \$ 20,000 \\\hline \text { Useful life of the asset } & 10 \text { years } \\\hline \text { Annual operating profit, including depreciation } & \$ 4,000 \\\hline \text { Sabage value } & \$ - 0 - \\\hline\end{array}$$ What is the return on investment (ROI)assuming User-Friendly (a)uses the straight-line method for depreciation and (b)beginning-of-year net book values to compute ROI?

A) 11.1%.
B) 20.0%.
C) 22.2%.
D) 25.0%.

Question 36

The Maxim Corporation reported the following operating results for its three divisions: South,West,and East $$\begin{array} { | l | r | r | r | } \hline & \begin{array} { r } \text { South } \\\text { Division }\end{array} & \begin{array} { r } \text { West } \\\text { Division }\end{array} & \begin{array} { r } \text { East } \\\text { Division }\end{array} \\\hline \text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \\\hline \begin{array} { l } \text { Operating } \\\text { profits }\end{array} & \$ 20,000 & \$ 50,000 & \$ 100,000 \\\hline \begin{array} { l } \text { Dwisional } \\\text { assets }\end{array} & \$ 200,000 & \$ 625,000 & \$ 800,000 \\\hline\end{array}$$ .Which division has the smallest return on investment (ROI)?

A) South.
B) West.
C) East.
D) All three divisions are the same.

Question 37

A manager can always increase his/her return on investment (ROI)by:

A) reducing the asset turnover.
B) decreasing residual income.
C) increasing the operating profit margin.
D) expanding operating assets while holding sales and expenses constant.

Question 38

If a division is evaluated using return on investment (ROI)without regard to how assets are financed,the denominator in the ROI calculation will be:

A) current assets.
B) working capital.
C) total assets available.
D) total assets employeD.
Total assets employed takes out the financing.

Question 39

Which of the following statements is(are)true? (A)Divisional income statements do not include allocated common costs.(B)The gross margin ratio is computed by dividing operating income by sales.

A) Only A is true.
B) Only B is true.
C) Both A and B are true.
D) Neither A nor B is true.

Question 40

How will increases in the following items affect return on investment (ROI)? $$\begin{array} { | l | l | l | } \hline & \text { Erpenses } & \text { Imrentory } \\\hline \text { A. } & \text { Decrease } & \text { Decrease } \\\hline \text { B. } & \text { Decrease } & \text { Increase } \\\hline \text { C. } & \text { Increase } & \text { Decrease } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 41

The following information pertains to Artemis Co.for the year ended December 31: (CPA adapted)
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 600,000 \\\hline \text { Income } & \$ 100,000 \\\hline \text { Capital investment } & \$ 400,000 \\\hline\end{array}$$ Which of the following equations should be used to compute Artemis' return on investment (ROI)?

A) (4/6)× (6/1)= ROI
B) (6/4)× (1/6)= ROI
C) (4/6)× (1/6)= ROI
D) (6/4)× (6/1)= ROI

Question 42

The Dry Wall Division reports the following operating data for the past two years:
$$\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\\hline \text { Turnourer } & 16 \% & ? \\\hline \text { Average operating assets } & 2.5 & 2 \\\hline \text { Net operating income } & \$ 40,000 & ? \\\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\\hline \text { Sales } & ? & ? \\\hline\end{array}$$ The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Sales in Year 2 amounted to:

A) $250,000.
B) $300,000.
C) $325,000.
D) $350,000.

Question 43

The following data are available for the South Division of Manhattan Products,Inc.and the single product it makes:
$$\begin{array} { | l | r | } \hline \text { Unit selling price } & \$ 20 \\\hline \text { Variable cost per unit } & \$ 12 \\\hline \text { Annual fixed costs } & \$ 280,000 \\\hline \text { Average operating assets } & \$ 1,500,000 \\\hline\end{array}$$ How many units must South sell each year to have an ROI of 16%?

A) 240,000.
B) 1,300,000.
C) 52,000.
D) 65,000.

Question 44

A firm earning a profit can increase its return on investment by: (CMA adapted)

A) increasing sales revenue and operating expenses by the same dollar amount.
B) decreasing sales revenues and operating expenses by the same percentage.
C) increasing investment and operating expenses by the same dollar amount.
D) increasing sales revenues and operating expenses by the same percentage.

Question 45

Last year a company had stockholders' equity of $160,000,net operating income of $16,000,and sales of $100,000.The turnover was 0.5.The return on investment (ROI)was:

A) 10%.
B) 9%.
C) 8%.
D) 7%.

Question 46

Average operating assets are $110,000 and net operating income is $23,100.The company invests $25,000 in new assets for a project that will increase net operating income by $4,750.What is the return on investment (ROI)of the new project?

A) 21%.
B) 19%.
C) 18.5%.
D) 20%.

Question 47

The Dry Wall Division reports the following operating data for the past two years:
$$\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\\hline \text { Turnourer } & 16 \% & ? \\\hline \text { Average operating assets } & 2.5 & 2 \\\hline \text { Net operating income } & \$ 40,000 & ? \\\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\\hline \text { Sales } & ? & ? \\\hline\end{array}$$ The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Average operating assets in Year 1 were:

A) $160,000.
B) $150,000.
C) $125,000.
D) $100,000.

Question 48

The Country Garden Company's current net operating income is $16,800 and its average operating assets are $80,000.The Country Garden's required rate of return is 18%.A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000.What is the residual income of the new project?

A) 20.8%.
B) 20%.
C) $(150).
D) $300.

Question 49

In computing the margin in a ROI analysis,which of the following is used?

A) Sales in the denominator.
B) Net operating income in the denominator.
C) Average operating assets in the denominator.
D) Residual income in the denominator.

Question 50

Return on investment (ROI)is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue,cost,investment)into a single measure.Under which one of the following combinations of actions regarding a segment's revenues,costs,and investment would a segment's ROI always increase? (CIA adapted) $$\begin{array} { | l | c | c | c | } \hline & \text { Sales } & \text { Equipment } & \text { Inrestment } \\\hline \text { A. } & \text { Increase } & \text { Decrease } & \text { Increase } \\\hline \text { B. } & \text { Decrease } & \text { Decrease } & \text { Decrease } \\\hline \text { C. } & \text { Increase } & \text { Increase } & \text { Increase } \\\hline \text { D. } & \text { Increase } & \text { Decrease } & \text { Decrease } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 51

Sales and average operating assets for Wyeth Company and Genesis Company are given below:
$$\begin{array} { | l | r | r | } \hline & \text { Sales } & \text { Average Operating Assets } \\\hline \text { Wyeth Company } & \$ 20,000 & \$ 8,000 \\\hline \text { Genesis Company } & \$ 50,000 & \$ 10,000 \\\hline\end{array}$$ What is the margin that each company will have to earn in order to generate a return on investment of 20%?

A) 12% and 16%.
B) 50% and 100%.
C) 8% and 4%.
D) 2.5% and 5%.

Question 52

How will decreases in the following items affect return on investment (ROI)? $$\begin{array} { | l | c | c | } \hline & \text { Sales } & \text { Equipment } \\\hline \text { A. } & \text { Decrease } & \text { Decrease } \\\hline \text { B. } & \text { Decrease } & \text { Increase } \\\hline \text { C. } & \text { Increase } & \text { Decrease } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 53

A division earning a profit will increase its return on investment (ROI)if it increases operating expenses and:

A) sales by the same dollar amount.
B) sales by the same percentage.
C) investment by the same dollar amount.
D) investment by the same percentage.

Question 54

The Gallop Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.What was Gallop's operating profit margin?

A) 5.0%.
B) 6.0%.
C) 6.7%.
D) 8.3%.

Question 55

In determining the dollar amount to use for operating assets in the return on investment (ROI)calculation,companies will generally use either net book value or gross cost of the assets.Which of the following is an argument for the use of net book value rather than gross cost?

A) It is consistent with how assets are reported on the balance sheet.
B) It eliminates the depreciation method as a factor in ROI calculations.
C) It encourages the replacement of old,worn-out equipment.
D) all of the above.

Question 56

The following information pertains to Zootime Co.'s Shelter Division for the current year: (CPA adapted)
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 311,000 \\\hline \text { Variable cost } & \$ 250,000 \\\hline \text { Traceable fixed costs } & \$ 50,000 \\\hline \text { Average invested capital } & \$ 40,000 \\\hline \text { Imputed interest rate } & 10 \% \\\hline\end{array}$$ Zootime's return on investment was:

A) 10.00%.
B) 13.33%.
C) 27.50%.
D) 30.00%.

Question 57

The Dry Wall Division reports the following operating data for the past two years:
$$\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\\hline \text { Turnourer } & 16 \% & ? \\\hline \text { Average operating assets } & 2.5 & 2 \\\hline \text { Net operating income } & \$ 40,000 & ? \\\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\\hline \text { Sales } & ? & ? \\\hline\end{array}$$ The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Net operating income in Year 2 amounted to:

A) $60,000.
B) $50,000.
C) $40,000.
D) $35,000.

Question 58

Imagination Corporation uses residual income to evaluate the performance of its divisions.Imagination's minimum required rate of return is 11%.In April,the Commercial Products Division had average operating assets of $100,000 and net operating income of $9,400.What was the Commercial Products Division's residual income in April?

A) $(1,600).
B) $1,600.
C) $1,034.
D) $(1,034).

Question 59

The Dry Wall Division reports the following operating data for the past two years:
$$\begin{array} { | l | r | r | } \hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \\\hline \text { Turnourer } & 16 \% & ? \\\hline \text { Average operating assets } & 2.5 & 2 \\\hline \text { Net operating income } & \$ 40,000 & ? \\\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \\\hline \text { Sales } & ? & ? \\\hline\end{array}$$ The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.The margin in Year 2 was:

A) 48%.
B) 32%.
C) 20%.
D) 10%.

Question 60

Rex Company's sales last year totaled $150,000 and its return on investment (ROI)was 12%.If the company's turnover was 3,then its net operating income for the year must have been:

A) $6,000.
B) $2,000.
C) $18,000.
D) it is impossible to determine from the data given.

Question 61

The following information is available for Kiss Company:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 100,000 \\\hline \text { Operating expenses } & \$ 94,000 \\\hline \text { Operating assets } & \$ 40,000 \\\hline \text { Stockholder's equity } & \$ 25,000 \\\hline \text { Cost of capital } & 10 \% \\\hline\end{array}$$ What is Kiss Company's residual income?

A) $2,000.
B) $2,500.
C) $3,500.
D) $4,000.

Question 62

Kevin Thomas is the general manager of the Modular Homes Division,and his performance is measured using the residual income method.Thomas is reviewing the following forecasted information for his division for next year: (CMA adapted)
$$\begin{array} { | l | r | } \hline \text { Category } & \begin{array} { r } \text { Amount } \\\text { (thousanos) }\end{array} \\\hline \text { Working capital } & \$ 1,800 \\\hline \text { Revenue } & 30,000 \\\hline \text { Plant and equipment } & 17,200 \\\hline\end{array}$$ If the cost of capital is 15% and Thomas wants to achieve a residual income target of $2,000,000,what will costs have to be in order to achieve the target?

A) $9,000,000.
B) $10,800,000.
C) $25,150,000.
D) $25,690,000.

Question 63

Residual income is a performance evaluation that is used in conjunction with,or instead of,return on investment (ROI).In many cases,residual income is preferred to ROI because: (CIA adapted)

A) residual income is a measure over time,while ROI represents the results for one period.
B) residual income concentrates on maximizing absolute dollars of income rather than a percentage return,as with ROI.
C) the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI.
D) average investment is employed with residual income while year-end investment is employed with ROI.

Question 64

In 2016,Evans Corporation had an operating profit of $750,000 and a residual income of $300,000.If Evans' cost of capital is 15%,what is the amount of the invested capital?

A) $5,000,000.
B) $3,000,000.
C) $2,000,000.
D) $1,250,000.

Question 65

Which of the following should not be used for the cost of capital to compute residual income?

A) Historical weighted average cost of capital.
B) Marginal after-tax cost of new equity capital.
C) Cost of debt and equity used to finance a project.
D) Return on investment (ROI).

Question 66

How will decreases in the following items affect residual income? $$\begin{array} { | l | l | l | } \hline & \text { Erpenses } & \text { Inventory } \\\hline \text { A. } & \text { Decrease } & \text { Decrease } \\\hline \text { B. } & \text { Decrease } & \text { Increase } \\\hline \text { C. } & \text { Increase } & \text { Decrease } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 67

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that:

A) residual income can be computed without regard to identifying an investment base.
B) appropriate goal congruence behavior is more likely to occur when using residual income.
C) residual income is well accepted in many organizations and often used in the financial press.
D) ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.

Question 68

The following information has been gathered for the Door Division: C $$\begin{array} { | l | r | } \hline \text { Return on inw estment (Rol) } & 15.0 \% \\\hline \text { Sales } & \$ 120,000 \\\hline \text { Operating assets } & \$ 60,000 \\\hline \text { Cost of Capital } & 12.0 \% \\\hline \text { Profit margin } & 7.5 \% \\\hline\end{array}$$ ompute the Door Division's residual income.

A) $1,800.
B) $2,700.
C) $3,600.
D) $5,400.

Question 69

The Pathways Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?

A) 6.0%.
B) 10.0%.
C) 15.0%.
D) 20.0%.

Question 70

Use the following information to compute residual income: $$\begin{array} { | l | r | } \hline \text { Sales } & \$ 320,000 \\\hline \text { Operating inc ome } & \$ 60,000 \\\hline \text { Average current assets } & \$ 250,000 \\\hline \text { Cost of capital } & 12 \% \\\hline \text { Return on inw estment } & 15 \% \\\hline\end{array}$$

A) $12,000.
B) $22,500.
C) $30,000.
D) $48,000.

Question 71

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?

A) An increase in sales.
B) An increase in the minimum required rate of return.
C) A decrease in expenses.
D) A decrease in operating assets.

Question 72

How will increases in the following items affect residual income? $$\begin{array} { | l | c | c | } \hline & \text { Sales } & \text { Equipment } \\\hline \text { A. } & \text { Decrease } & \text { Decrease } \\\hline \text { B. } & \text { Decrease } & \text { Increase } \\\hline \text { C. } & \text { Increase } & \text { Decrease } \\\hline \text { D. } & \text { Increase } & \text { Increase } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 73

Which of the following statement(s)is/are true? (A)If a division's return on investment (ROI)exceeds its cost of capital,then its residual income is positive.(B)If a division's cost of capital equals its return on investment (ROI),then its residual income is zero.

A) Only (A)is true.
B) Only (B)is true.
C) Both (A)and (B)are true.
D) Neither (A)and (B)is true.

Question 74

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

A) accountant's
B) manager's
C) shareholder's
D) economist's

Question 75

Bella Vista Service Co.is a computer service center.For the month of May,Bella Vista Service Co.had the following operating statistics: (CMA adapted)
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 450,000 \\\hline \text { Operating income } & 25,000 \\\hline \text { Net profit after taxes } & 8,000 \\\hline \text { Total assets } & 500,000 \\\hline \text { Stockholder's equity } & 200,000 \\\hline \text { Cost of capital } & 6 \% \\\hline\end{array}$$ Based on the above information,which one of the following statements is correct?

A) Bella Vista Service Co.has a return on investment of 4%.
B) Bella Vista Service Co.has a residual income of $(2,000).
C) Bella Vista Service Co.has a return on investment of 5.6%.
D) Bella Vista Service Co.has a residual income of $(22,000).

Question 76

All other things the same,which of the following would increase residual income?

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

Question 77

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

A) the problems associated with measuring the asset base are eliminated.
B) desirable investment decisions will not be neglected by high-return divisions.
C) only the gross book value of assets needs to be calculated.
D) the arguments about the implicit cost of interest are eliminateD.
Problems in measuring the asset base,gross versus net book values,and implicit cost of interest are present in both residual income and ROI.Residual income avoids the suboptimization problem with high return divisions.

Question 78

Division B had an ROI last year of 15%.The division's minimum required rate of return is 10%.If the division's average operating assets last year were $450,000,then the division's residual income for last year was:

A) $67,500.
B) $22,500.
C) $37,500.
D) $45,000.

Question 79

Which of the following statement(s)is/are false? (A)Residual income can be used to compare divisions of different sizes.(B)Residual income can be used to compare divisions that are profit centers.

A) Only (A)is false.
B) Only (B)is false.
C) Both (A)and (B)are false.
D) Neither (A)and (B)is false.

Question 80

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?

A) Land being held by the division as a potential site for a new plant and parking lot.
B) Division inventories when division management exercises control over the inventory levels.
C) Division accounts payable when division management exercises control over the amount of short-term credit utilized.
D) Division accounts receivable when division management exercises control over credit policy and credit terms.