Deck 10: Differential Analysis: the Key to Decision Making

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Residual income is the net operating income that an investment center earns above the minimum required return on the investment in fixed assets.

Answer 3

False

Question 4

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 greater than 12%.

Question 5

Residual income should not be used to evaluate a profit center.

Question 6

A disadvantage 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 7

Average operating assets is used in the numerator to compute turnover in an ROI analysis.

Question 8

Operating assets include cash, accounts receivable, and inventory but not any depreciable fixed assets.

Question 9

Margin equals net operating income divided by sales.

Question 10

Return on investment is superior to residual income as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole.

Question 11

Wait time is considered non-value-added time.

Question 12

Queue time is considered value-added time.

Question 13

Net operating income is income after interest and taxes.

Question 14

Move time is considered value-added time.

Question 15

When used in return on investment (ROI) calculations, operating assets do not include investments in land held for future use and investments in other companies.

Question 16

Process Time is the only non-value-added component of Throughput Time.

Question 17

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

Question 18

All other things being the same, a decrease in average operating assets will decrease return on investment (ROI).

Question 19

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

Question 20

Land held for possible plant expansion would not be included as an operating asset when computing return on investment (ROI).

Question 21

Last year a company had sales of $400,000, a turnover of 2.4, and a return on investment of 36%. The company's net operating income for the year was:

A)$144,000
B)$120,000
C)$80,000
D)$60,000

Question 22

CS Company has a profit margin of 11%. Sales are $320,000, net operating income is $35,200, and average operating assets are $128,000. What is the company's return on investment (ROI)?

A)2.5
B)11%
C)27.5%
D)0.40

Question 23

Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?

A)It allows the manager to replace old, worn-out equipment with a minimum adverse impact on ROI.
B)It allows ROI to decrease over time as assets get older.
C)It is consistent with how plant and equipment items are reported on the balance sheet.
D)It eliminates both age of equipment and method of depreciation as factors in ROI computations.

Question 24

Throughput Time consists of:

A)Process Time.
B)Inspection Time and Move Time.
C)Process Time, Inspection Time, and Move Time.
D)Process Time, Inspection Time, Move Time, and Queue Time.

Question 25

Consider the following three conditions: I. An increase in sales
II) An increase in operating assets
III) A reduction in expenses
Which of the above conditions provide a way in which a manager can improve return on investment?

A)Only I
B)Only I and II
C)Only I and III
D)Only II and III

Question 26

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:

A)Residual income can be computed without having to measure operating assets.
B)Managers are more likely to accept projects that are beneficial to the company.
C)ROI does not take into account both turnover and margin.
D)A minimum rate of return does not have to be specified when the residual income approach is used.

Question 27

Contribution income statements are used to measure the performance of:

A)cost centers.
B)both cost centers and profit centers.
C)both cost centers and investment centers.
D)both profit centers and investment centers.

Question 28

A cost center is not a responsibility center.

Question 29

Throughput time is the amount of time required to process raw materials into completed products.

Question 30

A balanced scorecard should not contain any performance measures concerning customer satisfaction since the extent to which customers are satisfied is beyond the control of any manager in the company.

Question 31

Because continuous improvement is very difficult, the emphasis in the balanced scorecard tends to be on meeting preset standards.

Question 32

Net operating income is defined as:

A)net income plus interest and taxes.
B)sales minus variable expenses.
C)sales minus variable expenses and traceable fixed expenses.
D)contribution margin minus traceable and common fixed expenses.

Question 33

Residual income:

A)is the return on investment (ROI) percentage multiplied by average operating assets.
B)is the net operating income earned above a certain minimum required return on sales.
C)is the net operating income earned above a certain minimum required return on average operating assets.
D)will always be greater than zero.

Question 34

Which of the following performance measures will decrease if the minimum required rate of return increases?

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

Question 35

Given the following data: Return on investment (ROI) would be:

A)5%
B)12%
C)25%
D)60%

Question 36

All profit centers are responsibility centers, but not all responsibility centers are profit centers.

Question 37

A profit center is responsible for generating revenue and for controlling costs.

Question 38

A company that is seeking to increase ROI should attempt to decrease:

A)sales.
B)turnover.
C)margin.
D)average operating assets.

Question 39

Manufacturing Cycle Efficiency (MCE) is computed as:

A)Throughput Time ÷ Delivery Cycle Time.
B)Process Time ÷ Delivery Cycle Time.
C)Value-Added Time ÷ Throughput Time.
D)Value-Added Time ÷ Delivery-Cycle Time.

Question 40

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

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

Question 41

Aguilera Industries is a division of a major corporation. Data concerning the most recent year appears below: The division's return on investment (ROI) is closest to:

A)2.1%
B)29.2%
C)22.6%
D)5.8%

Question 42

Garde Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below: The throughput time was:

A)36.2 hours
B)8.1 hours
C)3.3 hours
D)32.9 hours

Question 43

Nash Corporation manufactures and sells custom snowmobiles. From the time an order is placed till the time the snowmobile reaches the customer averages 50 days. This 50 days is spent as follows: What is Nash's manufacturing cycle efficiency (MCE) for its snowmobiles?

A)30.0%
B)37.5%
C)40.0%
D)60.0%

Question 44

Koogle Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 13%. In August, the Commercial Products Division had average operating assets of $530,000 and net operating income of $76,700. What was the Commercial Products Division's residual income in August?

A)-$9,971
B)-$7,800
C)$7,800
D)$9,971

Question 45

For the past year, Allargando Company recorded sales of $500,000 and average operating assets of $250,000. What is the margin that Allargando Company needed to earn in order to achieve an ROI of 12%?

A)6.00%
B)12.00%
C)2.00%
D)8.33%

Question 46

The Portland Division's operating data for the past two years is as follows: The Portland Division's margin in Year 2 was 150% of the margin for Year 1. The turnover for Year 1 was:

A)10.00
B)2.00
C)1.50
D)3.20

Question 47

In September, the Universal Solutions Division of Mcallister Corporation had average operating assets of $120,000 and net operating income of $12,800. The company uses residual income, with a minimum required rate of return of 12%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in September?

A)-$1,600
B)$1,600
C)-$1,536
D)$1,536

Question 48

If operating income is $60,000, average operating assets are $240,000, and the minimum required rate of return is 20%, what is the residual income?

A)40%
B)25%
C)$12,000
D)$48,000

Question 49

Brletich Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below: The delivery cycle time was:

A)9.1 hours
B)21.1 hours
C)22.5 hours
D)3.7 hours

Question 50

The Portland Division's operating data for the past two years is as follows: The Portland Division's margin in Year 2 was 150% of the margin for Year 1. The net operating income for Year 1 was:

A)$192,000
B)$128,000
C)$266,667
D)$208,000

Question 51

Aguilera Industries is a division of a major corporation. Data concerning the most recent year appears below: The division's turnover is closest to:

A)3.10
B)13.70
C)4.00
D)0.29

Question 52

The following information relates to last year's operations at the Bread Division of Rison Bakery Inc.: What was the Bread Division's minimum required rate of return last year?

A)12%
B)4%
C)15%
D)20%

Question 53

Fruchter Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below: The throughput time was:

A)4.6 hours
B)32.8 hours
C)11.0 hours
D)37.4 hours

Question 54

The following information relates to last year's operations at the Paper Division of Germane Corporation: What was the Paper Division's net operating income last year?

A)$24,300
B)$29,160
C)$145,800
D)$162,000

Question 55

Given the following data: The residual income would be:

A)$2,800
B)$0
C)$6,000
D)$8,000

Question 56

Ok Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below: The manufacturing cycle efficiency (MCE) was closest to:

A)0.47
B)0.02
C)0.07
D)0.12

Question 57

Aguilera Industries is a division of a major corporation. Data concerning the most recent year appears below: The division's margin is closest to:

A)32.3%
B)25.0%
C)29.2%
D)7.3%

Question 58

Emerich Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below: The manufacturing cycle efficiency (MCE) was closest to:

A)0.18
B)0.09
C)0.03
D)0.49

Question 59

Mccubbin Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below: The delivery cycle time was:

A)25.0 hours
B)13.1 hours
C)27.0 hours
D)3.5 hours

Question 60

Chabot Company had the following results last year: net operating income, $2,160; turnover, 5; and ROI 18%. Chabot Company's average operating assets were:

A)$300,000
B)$60,000
C)$10,800
D)$12,000

Question 61

The following information relates to the Quilt Division of TDS Corporation for last year: Assume that Quilt was being evaluated solely on the basis of residual income. Which of the following investment opportunities would Quilt want to invest in?

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

Question 62

Cabal Products is a division of a major corporation. Last year the division had total sales of $10,040,000, net operating income of $582,320, and average operating assets of $4,000,000. The company's minimum required rate of return is 14%. The division's margin is closest to:

A)5.8%
B)45.6%
C)14.6%
D)39.8%

Question 63

Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating income of $24,000. The average operating assets at Uptown last year amounted to $120,000. Last year at Uptown the margin used to calculate ROI amounted to:

A)8%
B)12%
C)20%
D)40%

Question 64

Cabal Products is a division of a major corporation. Last year the division had total sales of $10,040,000, net operating income of $582,320, and average operating assets of $4,000,000. The company's minimum required rate of return is 14%. The division's residual income is closest to:

A)$582,320
B)$22,320
C)($823,280)
D)$1,142,320

Question 65

Brandon Inc., has provided the following data for last year's operations: Brandon's residual income is:

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

Question 66

Daab Products is a division of a major corporation. The following data are for the most recent year of operations: The division's residual income is closest to:

A)$322,560
B)$622,560
C)($829,440)
D)$22,560

Question 67

Cabal Products is a division of a major corporation. Last year the division had total sales of $10,040,000, net operating income of $582,320, and average operating assets of $4,000,000. The company's minimum required rate of return is 14%. The division's turnover is closest to:

A)2.19
B)17.24
C)0.15
D)2.51

Question 68

Baad Industries is a division of a major corporation. Last year the division had total sales of $20,440,000, net operating income of $1,860,040, and average operating assets of $7,000,000. The division's margin is closest to:

A)9.1%
B)34.2%
C)26.6%
D)43.3%

Question 69

Daab Products is a division of a major corporation. The following data are for the most recent year of operations: The division's margin used to compute ROI is closest to:

A)2.8%
B)28.8%
C)10.8%
D)26.0%

Question 70

Daab Products is a division of a major corporation. The following data are for the most recent year of operations: The division's return on investment (ROI) is closest to:

A)10.8%
B)41.5%
C)0.3%
D)2.2%

Question 71

The following information relates to the Quilt Division of TDS Corporation for last year: What was the Quilt Division's return on investment (ROI) for last year?

A)13%
B)18%
C)40%
D)45%

Question 72

The Portland Division's operating data for the past two years is as follows: The Portland Division's margin in Year 2 was 150% of the margin for Year 1. The sales for Year 2 were:

A)$750,000
B)$2,000,000
C)$3,846,154
D)$2,400,000

Question 73

Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating income of $24,000. The average operating assets at Uptown last year amounted to $120,000. At Uptown the turnover used to calculate ROI last year was:

A)0.4
B)2.5
C)3.2
D)5.0

Question 74

Daab Products is a division of a major corporation. The following data are for the most recent year of operations: The division's turnover used to compute ROI is closest to:

A)3.84
B)0.11
C)35.71
D)3.47

Question 75

Last year the Uptown Division of Gorcen Enterprises had sales of $300,000 and a net operating income of $24,000. The average operating assets at Uptown last year amounted to $120,000. Last year at Uptown the return on investment was:

A)8%
B)12%
C)20%
D)40%

Question 76

The Portland Division's operating data for the past two years is as follows: The Portland Division's margin in Year 2 was 150% of the margin for Year 1. The average operating assets for Year 2 were:

A)$750,000
B)$400,000
C)$1,200,000
D)$800,000

Question 77

Baad Industries is a division of a major corporation. Last year the division had total sales of $20,440,000, net operating income of $1,860,040, and average operating assets of $7,000,000. The division's return on investment (ROI) is closest to:

A)21.0%
B)26.6%
C)6.8%
D)2.5%

Question 78

Cabal Products is a division of a major corporation. Last year the division had total sales of $10,040,000, net operating income of $582,320, and average operating assets of $4,000,000. The company's minimum required rate of return is 14%. The division's return on investment (ROI) is closest to:

A)4.1%
B)14.6%
C)36.6%
D)0.9%

Question 79

Baad Industries is a division of a major corporation. Last year the division had total sales of $20,440,000, net operating income of $1,860,040, and average operating assets of $7,000,000. The division's turnover is closest to:

A)0.27
B)2.92
C)10.99
D)2.31

Question 80

Brandon Inc., has provided the following data for last year's operations: Brandon's return on investment (ROI) is:

A)6%
B)10%
C)15%
D)24%