Deck 13: Performance Measurement in Decentralized Organizations

Question 1

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

A)the problems associated with measuring the asset base are eliminated.
B)desirable investment decisions will not be rejected by divisions that already have a high ROI.
C)only the gross book value of assets needs to be calculated.
D)returns do not increase as assets are depreciated.

Answer 1

B

Question 2

Which of the following is not an operating asset?

A)Cash
B)Inventory
C)Plant equipment
D)Common stock

Answer 2

D

Question 3

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

Answer 3

A

Question 4

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 5

Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? I. Net book value is consistent with how plant and equipment items are reported on a balance sheet.
II) Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense.
III) Net book value allows ROI to decrease over time as assets get older.

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

Question 6

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

Question 7

Residual income equals average operating assets multiplied by the difference between the return on investment and the minimum required rate of return.

Question 8

The performance measures on an individual's scorecard should not be overly influenced by actions taken by others in the company or by events that are outside of the individual's control.

Question 9

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

Question 10

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

Question 11

Turnover is computed by dividing average operating assets into:

A)invested capital.
B)total assets.
C)net operating income.
D)sales.

Question 12

A balanced scorecard should contain every performance measure that can be expected to influence a company's profits.

Question 13

Residual income is superior to return on investment 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 14

The use of return on investment as a performance measure may lead managers to make decisions that are not in the best interests of the company as a whole.

Question 15

If expenses exceed revenues in a department, then it would be considered a cost center.

Question 16

Which of the following three statements are correct? I. A profit center has control over both cost and revenue.
II) An investment center has control over invested funds, but not over costs and revenue.
III) A cost center has no control over sales

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

Question 17

Consider a company that has only variable costs. All other things the same, an increase in unit sales will result in no change in the return on investment.

Question 18

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 these.

Question 19

Managers of cost centers are evaluated according to the profits which their departments are able to generate.

Question 20

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 21

Garnick 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)3.5 hours
B)8.7 hours
C)34.9 hours
D)36.1 hours

Question 22

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 23

The margin in Year 2 was:

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

Question 24

The division's turnover is closest to:

A)20.00
B)4.35
C)0.22
D)3.57

Question 25

Niemiec 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)0.20
B)0.06
C)0.12
D)0.96

Question 26

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

A)38.8 hours
B)33.4 hours
C)14.1 hours
D)5.4 hours

Question 27

The division's return on investment (ROI) is closest to:

A)4.1%
B)21.75%
C)17.9%
D)1.1%

Question 28

Reed 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 29

Sales in Year 2 amounted to:

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

Question 30

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 31

Sales and average operating assets for Company P and Company Q are given below: 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 32

The division's margin is closest to:

A)21.8%
B)5.0%
C)23.0%
D)28.0%

Question 33

Soderquist Corporation uses residual income to evaluate the performance of its divisions. The company'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 34

Mordue 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)0.15
B)0.53
C)0.05
D)0.16

Question 35

In August, the Universal Solutions Division of Jugan Corporation had average operating assets of $670,000 and net operating income of $77,500. 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 August?

A)$2,900
B)-$2,900
C)-$9,300
D)$9,300

Question 36

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

A)33.1 hours
B)3.7 hours
C)12.6 hours
D)30.9 hours

Question 37

Hoster 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)8.9 hours
B)18 hours
C)4.5 hours
D)22.5 hours

Question 38

The purpose of the Data Processing Department of Falena Corporation is to assist the various departments of the corporation with their information needs free of charge. The Data Processing Department would best be evaluated as a:

A)cost center.
B)revenue center.
C)profit center.
D)investment center.

Question 39

Last year a company had stockholder's 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 40

A company's current net operating income is $16,800 and its average operating assets are $80,000. The company'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 41

What was the Consumer Products Division's minimum required return in March?

A)$7,812
B)$76,212
C)$68,400
D)$65,100

Question 42

The net operating income in Year 1 was:

A)$90,000
B)$135,000
C)$140,000
D)$150,000

Question 43

The division's margin is closest to:

A)39.7%
B)47.6%
C)7.9%
D)19.9%

Question 44

Sales in Year 1 amounted to:

A)$400,000
B)$900,000
C)$750,000
D)$1,200,000

Question 45

The margin in Year 2 was:

A)18.75%
B)27.00%
C)22.50%
D)12.00%

Question 46

What was the Consumer Products Division's residual income in March?

A)-$3,300
B)$3,300
C)-$7,812
D)$7,812

Question 47

Average operating assets in Year 1 were:

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

Question 48

The average operating assets amounted to:

A)$600,000
B)$400,000
C)$500,000
D)$800,000

Question 49

The margin used in ROI calculations was closest to:

A)18.00%
B)8.00%
C)6.67%
D)15.00%

Question 50

Division A's residual income is:

A)$20,000
B)$30,000
C)$35,000
D)$45,000

Question 51

What was the West Division's residual income in March?

A)-$6,700
B)$6,700
C)-$11,214
D)$11,214

Question 52

Division B's average operating assets is:

A)$81,200
B)$2,080,000
C)$1,333,333
D)$130,000

Question 53

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 54

The average operating assets in Year 2 were:

A)$720,000
B)$750,000
C)$800,000
D)$900,000

Question 55

Net operating income in Year 2 amounted to:

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

Question 56

What was the West Division's minimum required return in March?

A)$80,100
B)$86,800
C)$11,214
D)$98,014

Question 57

The residual income was:

A)$18,000
B)$10,000
C)$12,000
D)$16,000

Question 58

Division A's sales are:

A)$400,000
B)$625,000
C)$125,000
D)$200,000

Question 59

The division's turnover is closest to:

A)2.52
B)2.10
C)0.20
D)12.66

Question 60

The division's return on investment (ROI) is closest to:

A)19.9%
B)16.6%
C)1.6%
D)5.7%

Question 61

The throughput time was:

A)4.2 hours
B)9.5 hours
C)30.6 hours
D)26.4 hours

Question 62

What is the throughput (manufacturing cycle) time for the operation?

A)12.0 hours
B)9.0 hours
C)10.0 hours
D)5.8 hours

Question 63

The return on investment in Year 1 was:

A)48.00%
B)32.50%
C)7.58%
D)1.92%

Question 64

The division's residual income is closest to:

A)$575,100
B)$1,175,100
C)$(1,980,900)
D)$(24,900)

Question 65

The division's turnover is closest to:

A)3.82
B)4.26
C)0.12
D)37.04

Question 66

The minimum required rate of return in Year 1 was:

A)18%
B)17%
C)16%
D)15%

Question 67

The division's return on investment (ROI) is closest to:

A)49.0%
B)11.5%
C)0.3%
D)2.2%

Question 68

The division's return on investment (ROI) is closest to:

A)0.2%
B)41.6%
C)10.0%
D)1.9%

Question 69

The average operating assets for Year 2 amounted to:

A)$400,000
B)$800,000
C)$600,000
D)$500,000

Question 70

The manufacturing cycle efficiency (MCE) was closest to:

A)0.17
B)0.05
C)0.43
D)0.19

Question 71

The throughput time was:

A)9.3 hours
B)4.9 hours
C)30.9 hours
D)26 hours

Question 72

The manufacturing cycle efficiency (MCE) was closest to:

A)0.15
B)0.05
C)0.45
D)0.18

Question 73

If South wants a residual income of $50,000 and the minimum required rate of return is 10%, the annual turnover will have to be:

A)0.32
B)0.80
C)1.25
D)1.50

Question 74

The manufacturing cycle efficiency (MCE) for this operation is:

A)55%
B)45%
C)6.6 hours
D)5.4 hours

Question 75

The delivery cycle time was:

A)29.1 hours
B)30.6 hours
C)8 hours
D)2.7 hours

Question 76

The division's residual income is closest to:

A)$(320,640)
B)$1,119,360
C)$399,360
D)$(2,595,840)

Question 77

The division's margin is closest to:

A)26.4%
B)10.0%
C)2.4%
D)24.0%

Question 78

What is the move time recorded for the operation?

A)1.5 hours
B)6.5 hours
C)5.8 hours
D)0.85 hours

Question 79

The division's turnover is closest to:

A)3.78
B)41.67
C)4.16
D)0.10

Question 80

The division's margin is closest to:

A)26.2%
B)23.5%
C)2.7%
D)11.5%