Deck 14: Strategy and Control

Question 1

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Return on Investment for the Southern Division

A)14.9%.
B)12.3%.
C)2.8%.
D)4.5%.

Answer 1

14.9%.

Question 2

Carroll Company has two product lines, Q and P. During June, the company's net operating income was £25,000, and the common fixed expenses were £37,000. The contribution margin ratio for Q was 30%, its sales were £200,000, and its segment margin was £21,000. If the contribution margin for P was £80,000, the segment margin for P was

A)£62,000.
B)£59,000.
C)£62,000.
D)£41,000.

Answer 2

D

Question 3

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Net Residual Income for the Southern Division

A)£1,000,000.
B)£1,200,000
C)£1,300,000.
D)£232,000.

Answer 3

£232,000.

Question 4

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

-Calculate the Return on Investment for the Eastern Division

A)12.1%.
B)6.9%.
C)3.3%.
D)4.2%.

Question 5

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Net Residual Income for the Western Division

A)£240,000.
B)£360,000.
C)£420,000.
D)-£200,000.

Question 6

Ring Incorporated's income statement for the most recent month is given below. $$\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\\text { Contribution margin } & 216,000 & 56,000 & 160,000 \\\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\\text { Common fixed expenses } & \underline { 34,000 } & & \\\text { Net operating income } & \underline { £ 30,000 } & &\end{array}$$

-
For each of the following questions, refer back to the original data. The marketing department believes that a promotional campaign at Store P costing £5,000 will increase sales by £15,000. If the campaign is adopted, overall company net operating income should

A)decrease by £800.
B)decrease by £5,800.
C)increase by £5,800.
D)increase by £10,000.

Question 7

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Controllable Residual Income for the Southern Division

A)£1,000,000.
B)£1,200,000
C)£1,300,000.
D)£232,000.

Question 8

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

-Calculate the Controllable Residual Income for the Western Division

A)£1,502,600.
B)£2,100,000.
C)£1,600,000.
D)£2,100,000

Question 9

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

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

Question 10

Fenway Market has two stores, F and G. During February, Store F had a segment margin of £10,000, traceable fixed expenses of £26,000, and variable expenses equal to 55% of sales. Fenway Market as a whole had a combined segment margin of 15%, a contribution margin ratio of 40%, and total sales of £180,000. Based on this information, the traceable fixed expenses in Store G were

A)£19,000.
B)£17,000.
C)£30,000.
D)£36,000.

Question 11

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

-Calculate the Return on Investment after the new investment is accepted

A)14.1%.
B)22.10%.
C)14.8%.
D)15.65%.

Question 12

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Return on Investment for the Western Division

A)11.1%.
B)2.30%.
C)14.1%.
D)14.6%.

Question 13

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

- Calculate the Controllable Residual Income for the Eastern Division

A)£1,000,000.
B)£1,240,000
C)£1,088,000.
D)£132,000.

Question 14

Ring Incorporated's income statement for the most recent month is given below. $$\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\\text { Contribution margin } & 216,000 & 56,000 & 160,000 \\\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\\text { Common fixed expenses } & \underline { 34,000 } & & \\\text { Net operating income } & \underline { £ 30,000 } & &\end{array}$$

-
For each of the following questions, refer back to the original data. A proposal has been made that will lower variable costs in Store P to 65% of sales. However, this reduction can only be accomplished by a £16,000 increase in Store P's traceable fixed costs. If this proposal is implemented and sales remain constant, overall company net operating income should

A)remain the same.
B)decrease by £2,000.
C)increase by £2,000.
D)increase by £14,000.

Question 15

The divisional managers of West plc have requested that the method for calculating bonuses at the year be reviewed. Senior managers at the head office have proposed that a bonus of £40,000 will be paid to the divisional manager who has the best return on investment (ROI) of the 3 divisions and this policy is consistent with previous years. Divisional managers want the senior managers to take into account controllable costs and profits and residual income (RI) when deciding bonuses and also to include non-financial measures of performance. The main reason given by the head office for using ROI is that it is understood by all managers and that it is used by external analysts.
Summary of Management Accounts to 31 December 1997
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Sales } & 5,400,000 & 5,000,000 & 5,590,000 \\\hline \text { Controllable costs } & 3,700,000 & 3,502,000 & 3,660,000 \\\hline \text { Head Office Charges } & 998,000 & 1,282,000 & 1,170,000 \\\hline \text { Net Profit } & 702,000 & 716,000 & 760,000 \\\hline\end{array}$

Capital Employed
$\begin{array}{|l|l|l|l|}\hline & \text { Southern }(£) & \text { Eastern }(£) & \text { Western }(£) \\\hline \text { Total Investment } & 4,700,000 & 5,100,000 & 5,200,000 \\\hline \text { Controllable Investment } & 4,000,000 & 4,100,000 & 4,274,000 \\\hline\end{array}$
Cost of Capital
The head office has estimated that the group cost of capital is 10%
Financial and non-financial measures of performance
The divisional managers normally report on a wide range of financial measures each month to the head office but only use non-financial measures internally and each divisional manager is allowed to use their discretion when deciding on the range and number of measures to use.

-Calculate the Net Residual Income for the Eastern Division

A)-£1,000,000.
B)-£324,000
C)-£294,000.
D)£132,000.

Question 16

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

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

Question 17

A contribution income statement is probably the most effective tool for measuring performance in a cost center

Question 18

Segmented income statements are most meaningful to managers when they are prepared

A)on an absorption cost basis.
B)on a cost behaviour (contribution) basis.
C)on a cash basis.
D)in a single-step format.

Question 19

Ring Incorporated's income statement for the most recent month is given below. $$\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\\text { Contribution margin } & 216,000 & 56,000 & 160,000 \\\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\\text { Common fixed expenses } & \underline { 34,000 } & & \\\text { Net operating income } & \underline { £ 30,000 } & &\end{array}$$

-
For each of the following questions, refer back to the original data. Currently the sales clerks receive a salary of £17,000 per month in Store Q. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales in Store Q increase by £40,000. The new segment margin for Store Q should be

A)£47,000.
B)£61,000.
C)£85,000.
D)£44,000.

Question 20

Ring Incorporated's income statement for the most recent month is given below. $$\begin{array} { l l l l } & \text { Total } & \text { Store } P & \text { Store } Q \\\text { Sales } & £ 600,000 & £ 200,000 & £ 400,000 \\\text { Variable expenses } & \underline { 384,000 } & \underline { 144,000 } & \underline { 240,000 } \\\text { Contribution margin } & 216,000 & 56,000 & 160,000 \\\text { Traceable fixed expenses } & \underline { 152,000 } & \underline { 42,000 } & \underline { 110,000 } \\\text { Segment margin } & \underline { 64,000 } & \underline { £ 14,000 } & \underline { £ 50,000 } \\\text { Common fixed expenses } & \underline { 34,000 } & & \\\text { Net operating income } & \underline { £ 30,000 } & &\end{array}$$

-
For each of the following questions, refer back to the original data. If sales in Store Q increase by £30,000 as a result of a £7,000 increase in traceable fixed costs

A)Store Q's contribution margin should increase by £18,000.
B)Store Q's segment margin should increase by £12,000.
C)Store Q's contribution margin should increase by £11,000.
D)Store Q's segment margin should increase by £5,000.

Question 21

A transfer price is the price charged when one segment of a company provides goods or services to another segment of the company

Question 22

Managers of cost centers are evaluated according to the profits which their departments are able to generate
Falquez Company sells three products: R, S, and T. Data for activity of Falquez Company during July are as follows: $\begin{array}{lllll}&&&\text { Products }\\&\text { Total } &R &S&T\\\text { Sales } & £ 800,000 & £ 150,000 & ? & £ 200,000 \\\text { Contribution margin ratio } & 32 \% & ? & 25 \% & 40 \% \\\text { Traceable fixed expenses } & £ 120,000 & £ 25,000 & £ 60,000 & ?\end{array}$

Common fixed expenses for July amounted to £90,000.

Question 23

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000.

-
The contribution margin in pounds for Product B for June was

A)£20,000.
B)£111,000.
C)£120,000.
D)£200,000.

Question 24

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

Question 25

The segment margin for Product T was

A)£45,000.
B)£85,000.
C)£(10,000).
D)£80,000.

Question 26

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

- Calculate the Return on Investment before the new investment is accepted

A)16.64%.
B)12.9%.
C)22.8%.
D)14.5%.

Question 27

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

- Calculate the Residual Income before the new investment is accepted

A)£1,200,000.
B)£1,780,000
C)£1,076,000.
D)£1,432,000.

Question 28

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 29

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

-Calculate the Residual Income after the new investment is accepted

A)£918,800.
B)B.-£918,000.
C)£1,100,000.
D)£2,140,000.

Question 30

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

-Calculate the Return on Investment for the new investment of £2,000,000

A)8.12%.
B)16.9%.
C)4.33%.
D)4.14%.

Question 31

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000.

-
The net operating income for the company as a whole for June was

A)£20,000.
B)£90,000.
C)£170,000.
D)£300,000.

Question 32

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

Question 33

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000.

-The contribution margin ratio for Product C is

A)75%.
B)69%.
C)31%.
D)25%.

Question 34

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.

- Calculate the Residual Income for the new investment of £2,000,000

A)£1,000,000.
B)-£1,000,000
C)-£157,200.
D)-£182,000.

Question 35

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000.

-
The product line segment margin for Product A for June was

A)£200,000.
B)£80,000.
C)£65,000.
D)£10,000.

Question 36

The Gasson Company sells three products, Product A, Product B and Product C, and had sales of £1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled £350,000. Sales were: Product A, £500,000; Product B, £300,000; and Product C, £200,000. Traceable fixed costs were: Product A, £120,000; Product B, £100,000; and Product C, £60,000. The variable expenses of Product A were £300,000 and the variable expenses of Product B were £180,000.

-The common fixed expense for Gasson Company for the month of June was

A)£350,000.
B)£280,000.
C)£70,000.
D)£20,000.

Question 37

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

Question 38

The contribution margin for Product R was

A)£48,750.
B)£63,500.
C)£51,000.
D)£48,000.

Question 39

Chavez Company has two product lines-M and P. Line M had sales of £200,000 during October, a segment margin of 20%, and traceable fixed expenses of £30,000. The company as a whole had a contribution margin ratio of 30% and £135,000 in total contribution margin. Based on this information, total variable expenses for product P must have been

A)£130,000.
B)£155,000.
C)£185,000.
D)£315,000.

Question 40

A segment margin is defined as sales less traceable fixed costs

Question 41

A change in sales can affect margin and turnover

Question 42

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 43

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 44

If a cost must be arbitrarily allocated in order to be assigned to a particular segment, then that cost is a common cost

Question 45

Net operating income is income after interest and taxes

Question 46

Koen Company consists of two divisions, C and
B)£75,000.
C)£45,000.
D)£40,000.5 Show how changes in sales, expenses and assets affect an organizations ROI
D)In March, Koen Company reported a contribution margin of £50,000 for Division C.Division D had a contribution margin ratio of 30% and sales in Division D were £250,000.Net operating income for the company was £30,000 and traceable fixed expenses for the two divisions totaled £50,000.Lyons Company's common fixed expenses were

Question 47

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.

Question 48

Chang Company has two divisions, T and W. The company's overall contribution margin ratio is 40% when combined sales in the two divisions total £900,000. If variable expenses are £200,000 in Division T and if Division W's contribution margin ratio is 20%, the sales in Division W must be

A)£200,000.
B)£425,000.
C)£700,000.
D)£340,000.

Question 49

Sullivan Retailers has two stores: R and T. During July, Store R had a segment margin of £26,000, traceable fixed expenses of £34,000, and a contribution margin ratio of 20%. Store T had sales of £180,000, a contribution margin ratio of 40%, and a segment margin ratio of 5%. Variable expenses for the company as a whole totaled

A)£132,000.
B)£240,000.
C)£312,000.
D)£348,000.

Question 50

Sturr Market has 3 stores: P, Q, and R. During October, Store P had a contribution margin of £24,000 and a contribution margin ratio of 30%. Store Q had variable expenses of £48,000 and a contribution margin ratio of 40%. Store R had variable expenses of £84,000 and a variable expense ratio of 70% of sales. Sturr Market's total sales were

A)£320,000.
B)£360,000.
C)£440,000.
D)£280,000.

Question 51

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

Question 52

Return on investment (ROI) would experience the greatest decrease under which of the following situations
$\begin{array}{cc}&\text { Turnover}&\text {Margin }\\\end{array}$

A. $\begin{array}{cc}\text { Increase}&\text { Increase}\\\end{array}$
B. $\begin{array}{cc}\text {Increase}&\text { Decrease}\\\end{array}$
C. $\begin{array}{cc}\text {Decrease}&\text { lncrease}\\\end{array}$
D. $\begin{array}{cc}\text {Decrease}&\text {Decrease}\\\end{array}$

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

Question 53

All other things equal, if a division's traceable fixed expenses decrease

A)the division's segment margin will increase.
B)the overall company net operating income will decrease.
C)the division's contribution margin will increase.
D)the division's sales volume will increase.

Question 54

Net operating income for the company was

A)£166,000.
B)£256,000.
C)£334,000.
D)£ 46,000.

Question 55

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

Question 56

Consider the following statements:I. Rol may not be fully controllable by the division manager due to the presence of committed costs.
II. ROl tends to emphasize short-run profitability rather than long-run performance.
Which of these statements represents a disadvantage of ROI

A)Only I.
B)Only II.
C)Both I and II.
D)Neither I nor II.

Question 57

An advantage of the ROI formula is that it forces the manager to control the investment in operating assets as well as net operating income

Question 58

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 59

Residual income is the

A)contribution margin of an investment centre, less the required return on the average operating assets used by the centre.
B)contribution margin of an investment centre, plus the required return on the average operating assets used by the centre.
C)net operating income of an investment centre, less the required return on the average operating assets used by the centre.
D)net operating income of an investment centre, plus the required return on the average operating assets used by the centre.

Question 60

A company is analysing the performance of responsibility centers. Controllable revenue would be included in the performance reports of which of the following types of responsibility centers.
$\begin{array}{cc}&\text { Investrent centers}& \text {Profit centers }\\\end{array}$
A. $\begin{array}{ll}&&\text { No } &&&&&& \text { No } \\\end{array}$
B. $\begin{array}{ll}&&\text { No } &&&&&& \text { Yes } \\\end{array}$
C. $\begin{array}{ll}&&\text { Yes } &&&&&& \text { Yes } \\\end{array}$
D. $\begin{array}{ll}&&\text { Yes } & &&&&&\text { No }\end{array}$

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

Question 61

Explain the differences between cost centres, profit centres and investment centres and the resulting differences as to how they should be assessed.

Question 62

"Decentralisation has many advantages and disadvantages but overall I feel that it gives too much power to managers who aren't as good as the main board in making decisions." Discuss.

Question 63

Explain the differences between traceable and common fixed costs and the importance of differentiating between them in measuring performance.

Question 64

Common fixed costs are defined as those fixed costs that can be identified with a particular segment

Question 65

On page 576 of chapter 14, Quaker Oats' adoption of EVA is outlined. Explain how EVA could have led to this improvement.

Question 66

All other things equal, the return on investment is affected by a change in
$\begin{array}{cc}\text { operating}& \text { assets Margin }\\\end{array}$
A. $\begin{array}{l}&\text { Yes } &&&& \text { Yes } \\\end{array}$
B. $\begin{array}{l}&\text { No } &&&& \text { Yes } \\\end{array}$
C. $\begin{array}{l}&\text { No } &&&& \text { No } \\\end{array}$
D. $\begin{array}{l}&\text { Yes } &&&& \text { No }\end{array}$

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

Question 67

Division A is considering a project that will earn a rate of return that is greater than the required return on operating assets, but less than the division's ROI. Division B is considering a project that will earn a rate of return that is greater than the division's ROI, but less than the required return on operating assets. If the objective is to maximise residual income, would these divisions accept or reject their projects.
$\begin{array}{cc} \text { Division A}& \text {Division } B\\\end{array}$
A. $\begin{array}{cc} \text {Accept}& \text { Accept}\end{array}$
B. $\begin{array}{cc} \text {Reject}& \text { Accept}\end{array}$
C. $\begin{array}{cc} \text {Reject }& \text {Reject}\end{array}$
D. $\begin{array}{cc} \text {Accept}& \text { Reject}\end{array}$

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

Question 68

Soft Solutions problems of how to evaluate its Consumer Products Division, particularly with regard to shared costs, are outlined on page 579 of Ch 14. Explain possible solutions to this dilemma.

Question 69

In setting a transfer price, which of the following should not be considered

A)Fixed production costs of the buying division.
B)Production capacity of the selling division.
C)Product demand from outside customers.
D)Costs eliminated by internal transfers.

Question 70

A disadvantage of the return on investment formula is that it forces the manager to control sales volume and operating assets, but not expenses

Question 71

Evaluate the part that can be played by EVA and other metrics in measuring performance.

Question 72

Compare and contrast Return on Investment and Residual Income.