Deck 13: Financial Performance Measures and Incentive Schemes

Question 1

Net book value produces a misleading increase in return on investment because:

A) investment centres with old assets will show a higher return on investment than centres with new assets.
B) investment centres with old assets will show a lower return on investment than investment centres with new assets.
C) investment centres with old assets will show an equal return on investment centres with new assets.
D) book value reflects changing market values.

Answer 1

A

Question 2

The advantage of residual income as a measure of investment centre performance is:

A) it can be used to compare investment centres of different sizes.
B) it focuses on long-term performance.
C) it includes the organisation's minimum required rate of return.
D) it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required rate of return.

Answer 2

C

Question 3

The return on investment can be defined as:

A) capital invested divided by total sales.
B) total sales divided by capital invested.
C) profit divided by capital invested.
D) profit divided by total sales.

Answer 3

C

Question 4

Which of the following is an example of an intrinsic reward?

A) Cash bonus
B) Personal satisfaction
C) Larger office
D) Certificate of merit

Question 5

Calculate the return on investment of new equipment in the first year if:
Profit = $3 000 000
Invested capital = $45 000 000
Increase in divisional profits = $45 000
Purchase of new machine = $900 000

A) 5%
B) 6.66%
C) 1.5%
D) None of the given answers

Question 6

For Mildura Ltd, if the sales are $1 500 000, the invested capital $450 000 and the profit $90 000, what is the asset turnover for the year?

A) 20%
B) 5%
C) 30%
D) 333%

Question 7

The asset turnover of an organisation can be calculated as:

A) the amount of sales revenue divided by total invested capital.
B) total invested capital divided by sales revenue.
C) total sales revenue divided by profit.
D) profit divided by sales margin.

Question 8

The following information pertains to Bingo Concrete for the year 2008:
Sales are $1 500 000
Gross margin is $600 000
Profit is $90 000
What is the profit margin for the year?

A) 40%
B) 30%
C) 20%
D) 6%

Question 9

For Echuca Ltd sales are $1 500 000, profit is $90 000, invested capital is $450 000 and the interest rate is 8 per cent. What is the residual income for the year?

A) ($30 000)
B) $54 000
C) $82 800
D) $36 000

Question 10

Calculate the asset turnover from the following data:

A) 0.07
B) 0.67
C) 0.53
D) 0.05

Question 11

Fine Furnishings Pty Ltd earned residual income of $40 000 during the year. The net profit was $160 000 during the year and the cost of capital was 12 per cent. What was the return on investment for the year?

A) 9%
B) 12%
C) 16%
D) Insufficient information to determine

Question 12

Which of the following statements is false?

A) Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results.
B) Pay systems can be used at all levels of the organisation.
C) Pay systems focus on long-term results.
D) A pay system can include both cash and non-cash rewards.

Question 13

One of the disadvantages of return on investment is that:

A) it focuses on profit only and disregards the cost of the assets.
B) it may discourage managers from investing in profitable projects.
C) it does not enable comparison of investment centres of different sizes.
D) it focuses only on long-term performance.

Question 14

Holt Company Ltd determined residual income for the year of $22 000. The company's cost of capital was 12 per cent, the investment turnover was 2.0, and capital invested was $400 000. What was Holt Company's profit during the year?

A) $26 000
B) $48 000
C) $74 000
D) $70 000

Question 15

Which of the following gives a more accurate calculation of return on investment and residual income?

A) Total capital invested
B) Total assets
C) Average invested capital
D) Average cost of capital

Question 16

Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per cent. What was the investment turnover for the year?

A) 18%
B) 50%
C) 72%
D) 20%

Question 17

Precious Metals Pty Ltd earned residual income of $70 000 during the year. The net profit was $250 000 during the year and the required return was 15 per cent. What was the invested capital?

A) $1 200 000
B) $1 500 000
C) $1 400 000
D) $1 300 000

Question 18

Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What was its return on investment for the year?

A) 50%
B) 20%
C) 8%
D) 2%

Question 19

Managers' performance in an investment centre can best be evaluated by:

A) the total revenue under their control.
B) the total capital invested in the organisation and the sizeable amount of return.
C) the profit earned during a period less all revenues.
D) those revenues, costs and investments that they can control.

Question 20

One of the advantages of using net book value to measure invested capital is that:

A) it maintains consistency with the balance sheet prepared for external reporting purposes.
B) it allows comparison of return on investment with different companies.
C) the return on investment will increase steadily over time.
D) it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison of return on investment with different companies.

Question 21

Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and a return on investment of 15 per cent. What is the residual income?

A) ($24 000)
B) $24 000
C) $96 000
D) None of the given answers

Question 22

Which of the following statements is false?

A) Group reward schemes help people identify with the group.
B) Group reward schemes discriminate between good and bad performers.
C) Group reward schemes avoid excessive competition between employees.
D) Group reward schemes may encourage 'freeloaders'.

Question 23

Which of the following are, according to Herzberg, motivating factors?

A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Recognition AND working conditions

Question 24

Which of the following is/are an extrinsic reward?

A) Share options
B) Job satisfaction
C) Promotion
D) Share options AND promotion

Question 25

Return on investment may be improved by increasing:

A) cost of goods sold and expenses.
B) sales margin and cost of capital.
C) sales revenue and cost of capital.
D) capital turnover or sales margin.

Question 26

Which of the following are value drivers (i.e. create value for the business)?
I) Growth
Ii) Sustainability
Iii) Spread
Iv) Cost of capital

A) i, ii and iii
B) ii, iii and iv
C) i, iii and iv
D) All of the given answers

Question 27

Which of the following is the correct mathematical expression for return on investment?

A) Sales margin $\div$ capital turnover
B) Sales margin - capital turnover
C) Sales margin $\times$ capital turnover
D) Capital turnover $\div$ sales margin

Question 28

Which of the following statements is/are correct?

A) Invested capital is the assets that an investment centre has available to generate profit.
B) When evaluating an investment centre, only the profit is important.
C) Return on investment focuses on how effectively each investment centre has used its investment capital.
D) Invested capital represents the assets that an investment centre has available to generate profit AND return on investment focuses on how effectively each investment centre has used its investment capital.

Question 29

Given that return on investment measures performance over time, the invested capital would most appropriately be calculated by using:

A) beginning of year assets.
B) average assets.
C) total assets.
D) current assets.

Question 30

Shareholder value added may be defined as:

A) corporate value - market value of the company.
B) corporate value - market value of debt.
C) corporate value - present value of liabilities.
D) corporate value - current liabilities.

Question 31

All the following actions will increase return on investment except:

A) an increase in sales revenues.
B) a decrease in operating expenses.
C) a decrease in the company's invested capital.
D) a decrease in the number of units sold.

Question 32

The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of invested capital and a profit of $1 million. What is the imputed interest rate?

A) 7.5%
B) 10.0%
C) 12.5%
D) 20%

Question 33

Which of the following measures of performance is based, in part, on weighted average cost of capital?

A) Return on investment
B) Capital turnover
C) Return on sales
D) Economic value added

Question 34

White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000. What was the company's invested capital?

A) $300 000
B) $900 000
C) $1 500 000
D) $7 500 000

Question 35

The following information relates to Black's Mount Ltd:
What is its economic value added?

A) $120 000
B) $180 000
C) $240 000
D) $292 000

Question 36

The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million and the imputed interest rate is 12 per cent. What is the residual income?

A) $180 000
B) $1.78 million
C) $2.15 million
D) $3 700 000

Question 37

The profitability of an investment centre can best be evaluated by:

A) the revenues, costs and investment the manager can control.
B) the total capital invested in the organisation and the sizeable amount of return.
C) the profit margin and the investment capital traceable to the investment centre.
D) the divisional contribution margin.

Question 38

Which of the following is/are, according to Herzberg, hygiene factors?

A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Working conditions AND relationships with colleagues

Question 39

Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?

A) $1 400 000
B) $1 800 000
C) $1 840 000
D) None of the given answers

Question 40

Which of the following strategies may increase economic value added?

A) Increase profit as a percentage of capital employed.
B) Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C) Sell off assets that earn more than the weighted average cost of capital.
D) Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted average cost of capital.

Question 41

Which of the following items do not form part of the economic value added calculation?

A) Weighted average cost of capital
B) Book value of equity
C) Market value of equity
D) Income tax rate

Question 42

Which of the following may be implemented as targets for a group or company-wide performance reward scheme?
I) Employee absenteeism
Ii) Lost-time accidents
Iii) Customer satisfaction

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 43

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the return on sales for the period.

A) 4%
B) 11%
C) 40%
D) 0.4%

Question 44

Which of the following statements is/are correct when describing expectancy theory?
I) The preference that an employee has for a particular reward is called valence.
Ii) Expectancy is the likelihood of achieving the performance necessary to earn the reward.
Iii) An individual's perception that the effort put into a task will lead to a specific reward outcome is fundamental to expectancy theory.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 45

A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. If a rate of 10 per cent is used to compute imputed interest, calculate the division's return on investment (rounded to a whole number).

A) 4%
B) 10%
C) 16%
D) 35%

Question 46

Which of the following statements is/are false?
I) Return on investment encourages managers to take a long-term view of corporate performance.
Ii) Return on investment may encourage managers to defer the replacement of worn assets.
Iii) Return on investment may encourage managers to increase expenditure on research and development.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 47

Which of the following is used in the calculation of both return on investment and residual income?

A) Total shareholders' equity
B) Retained earnings
C) Invested capital
D) Cost of capital

Question 48

The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is considering an investment opportunity that will reduce this negative amount to $400 000. The investment:

A) should be pursued because it is attractive from divisional and corporate perspectives.
B) should be pursued because it is attractive from a divisional perspective although not from a corporate perspective.
C) should be pursued because it is attractive from a corporate perspective, although not from a divisional perspective.
D) should not be pursued because it is unattractive from a divisional perspective although it is attractive from a corporate perspective.

Question 49

Which of the following are included in performance-related pay systems?
I) Share options
Ii) Profit sharing
Iii) Team-based bonuses

A) i and ii
B) i and iii
C) ii and iii
D) All of the given answers

Question 50

Individual reward schemes have which of the following advantages?
I) They relate to individual effort.
Ii) They reward only good performers.
Iii) They discourage dysfunctional competition between individuals.

A) i and ii
B) i and iii
C) ii and iii
D) None of the given answers

Question 51

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the investment turnover (rounded) for the period.

A) 0.37 times
B) 11 times
C) 0.11 times
D) 2.7 times

Question 52

For which of the following reasons are group pay systems often preferred to individual schemes?
I) They encourage teamwork.
Ii) They reduce dysfunctional competition between employees.
Iii) They promote equity between employees.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 53

Which of the following items will be most relevant in determining the imputed interest rate for the purposes of calculating residual income?

A) Final net profit
B) Return on investment
C) Investment turnover
D) Riskiness of investments undertaken

Question 54

The return on investment of a division will increase if the division is able to:

A) increase return on sales and increase investment turnover.
B) increase return on sales or increase investment turnover.
C) increase sales revenue and decrease asset turnover.
D) increase return on sales and/or increase investment turnover.

Question 55

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the return on investment for the period.

A) 11%
B) 10%
C) 4%
D) Always the same as the imputed interest rate

Question 56

The income calculation for a divisional manager's return on investment should be based on:

A) divisional contribution margin.
B) profit margin controllable by the divisional manager.
C) profit margin traceable to the division.
D) division income before interest and income tax.

Question 57

Carlton division has been stagnant for the past five years, neither growing nor contracting in size and profitability. Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued at net book value) when measuring return on investment result in (1) using numbers that are consistent with those in the balance sheet and (2) a rising return on investment over time?

A)
B)
C)
D)

Question 58

Which of the following is/are an intrinsic reward?

A) Share options
B) Job satisfaction
C) Promotion
D) Share options AND job satisfaction

Question 59

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the amount of residual income for the period.

A) $70 000
B) $7000
C) $77 000
D) $680 000

Question 60

Sunrise Dairies has a return on investment of 15 per cent. A Sunrise division, which currently has a return on investment of 13 per cent and $750 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $120 000. If Sunrise strives for goal congruence, the investment:

A) should not be approved because it reduces divisional return on investment.
B) should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered.
C) should be approved because it produces $120 000 residual income for the division.
D) should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers.

Question 61

When measuring profit and invested capital, managers have to decide how they will define what will be included in invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an example, the three definitions of invested capital that can be applied.

Question 62

When employees feel that they have made a significant achievement in reaching the purpose of the task they are working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:

A) competence.
B) progress.
C) meaningfulness.
D) choice.

Question 63

Value-based management (VBM) is a framework for making key decisions that add economic value to the business. Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these aspects assist managers in their decision making.

Question 64

The following information is available for Jittie Ltd:
The WACC for Jittie Ltd is:

A) 7.6%
B) 9.25%
C) 10.9%
D) 9.5%

Question 65

Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.

Question 66

When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this has been identified (Robbins et al., 2004; Thomas, 2000) as:

A) competence.
B) progress.
C) meaningfulness.
D) choice.

Question 67

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries. However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these calls, customers are often very emotional and sometimes even abusive. Call operators have no control over what types of calls they get.
Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and (2) 80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'. Achieving these two monthly performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.
Based on expectancy theory, the major limitation(s) of Jasmine's reward system is:

A) the incentive system lacks valence and instrumentality.
B) the incentive system lacks expectancy.
C) the incentive system lacks instrumentality.
D) the incentive system lacks expectancy and instrumentality.

Question 68

Which of the following statements about developing reward system is incorrect?

A) The key benefit of a profit sharing plan is to encourage employees to think like owners.
B) The key benefit of gain sharing plan is to introduce equity, ensuring the employees who contribute to the business can get a share of the gains.
C) The key benefit of an employee share plan is to reduce free-riding problems.
D) The key benefit of an individual-based incentive system is to highlight improved expectancy and instrumentality.

Question 69

Which of the following would be considered an advantage of a group scheme?

A) Equity among employees
B) Rewarding only good performers
C) Competitiveness between employees
D) Individual identification

Question 70

Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the investment:

A) should not be approved because it reduces divisional return on investment.
B) should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered.
C) should be approved because it produces $60 000 residual income for the division.
D) should be approved because, after acquisition, the division's return on investment and residual income are both positive numbers.

Question 71

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard.
All her call centre operators agree that these two targets are clearly specified, objectively measured and achievable with hard work. However, the call centre operators are still unhappy with the new incentive system. According to the expectancy theory, this is because:

A) the incentive system lacks valence and instrumentality.
B) the incentive system lacks expectancy.
C) the incentive system lacks expectancy and valence.
D) the incentive system lacks expectancy and instrumentality.

Question 72

Value-based management refers to:

A) a framework for applying EVA to all business decisions.
B) a framework for making key business decisions that add economic value to the business.
C) a philosophy that management should focus on creating customer value.
D) a valuation technique that uses discounted cash flows to estimate imputed cost of capital.

Question 73

A group-based reward system is appropriate when:
I) team work is important and employees need to work together to achieve organisational goals.
Ii) it is easy to see individual's effort and performance.
Iii it is important to discriminate between good performers and bad performers.

A) i
B) i and ii
C) i and iii
D) ii and iii

Question 74

Providing an employee incentive scheme that offers more frequent and timely incentives will:

A) discourage employees from making performance targets.
B) continually motivate employees.
C) not impact on an employee's performance.
D) provide no indication of an employee's target achievements.

Question 75

Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries. However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For these calls, customers are often very emotional and sometimes even abusive. The call centre operators are only responsible for documenting the complaints and are generally unable to solve the problems for the customers.
Jasmine has developed a new reward system for her call centre staff. Under the new system, call centre operators are rewarded with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set on average call duration; and (2) a target based on 'customer service quality'. While the call centre operators working for Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing personality. Many operators are also experiencing a lot of stress when dealing with rude customers.
Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation.

Question 76

Which of the following is a key difference between EVA and residual income?

A) The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income.
B) Net profit is used to calculate residual income but is irrelevant for EVA.
C) EVA has a long term focus, but residual income has a short term focus.
D) There is no difference between EVA and residual income.

Question 77

Under a deferred payment incentive schemes managers are likely to:

A) maximise short-term profit.
B) focus on short-term plans.
C) maximise medium and long-term profits.
D) strive for short-term performance.

Question 78

Which of the following information is required to compute SVA (shareholder value added)?
I) PV of cash flows from operations for a certain time period
Ii Residual value of the business
Iii EVA (economic value added)

A) i and ii
B) i and iii
C) i, ii and iii
D) i

Question 79

The following information is available for Nettie Ltd:
The company tax rate is 30 per cent. WACC is:

A) 11.2%
B) 10%
C) 7.8%
D) 9.5%

Question 80

Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the performance of investment centres.