Question 1

Return on investment (ROI)is calculated as
A)operating income/average operating assets.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/sales.

Accepted Answer

ROI is calculated by dividing the operating income by the average operating assets. This ratio gives an idea of how effectively a company is using its assets to generate profits. Option A is the correct formula for calculating ROI.

Question 2

Decentralization is frequently chosen by companies because it
A)allows higher management to make all decisions.
B)allows higher management to gather local information to make better decisions.
C)protects segments of the company from competitive pressures.
D)allows for training and motivation of local managers.
E)allows the CEO to make all important decisions.

Accepted Answer

Decentralization empowers lower-level managers and employees by giving them the authority to make decisions. This approach is often used to train local managers in decision-making and to keep them motivated by providing them with a sense of ownership and responsibility for their operations.

Question 3

Which of the following is a disadvantage of a focus on return on investment?
A)It can encourage managers to focus on cost cutting efforts.
B)It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.
C)It can encourage managers to cut inventories and reduce overall investment.
D)It can encourage managers to focus on the long run at the expense of the short run.
E)It can accomplish all of these disadvantages.

Accepted Answer

A focus on return on investment can create a narrow focus on divisional profitability, leading managers to prioritize short-term profits for their division rather than the long-term profitability of the entire firm. This can result in sacrificing investments in areas that may not produce immediate returns but are important for long-term success, such as research and development or employee training. Options A, C, and D can also be disadvantages but are not as directly related to a focus on return on investment as option B. Therefore, option B is the best choice.

Question 4

If the operating asset turnover increased by 50 percent and the margin increased by 50 percent,the ROI would increase by
A)50%.
B)25%.
C)100%.
D)125%.

Accepted Answer

ROI = operating asset turnover * margin. If both the operating asset turnover and the margin increases by 50%, then:
New ROI = (1.5*1.5) * ROI = 2.25 * ROI

Therefore, the ROI would increase by 125%.

Question 5

Shandling Company had operating income of $70,000,sales of $218,750,and turnover of 0.5.What is Shandling's ROI?
A)32%
B)50%
C)16%
D)64%
E)cannot be determined from this information

Accepted Answer

Return on Investment (ROI) is calculated as Operating Income divided by Average Operating Assets. Given the turnover (Sales/Average Operating Assets) is 0.5, we can find Average Operating Assets as Sales/Turnover = $218,750/0.5 = $437,500. Then, ROI = Operating Income/Average Operating Assets = $70,000/$437,500 = 0.16 or 16%.

Question 6

If the operating asset turnover ratio increased by 30 percent and the margin increased by 20 percent,the divisional ROI
A)would increase by 56 percent.
B)would decrease by 60 percent.
C)would increase by 20 percent.
D)cannot be determined.

Accepted Answer

The divisional ROI is calculated as the product of the operating asset turnover ratio and the margin. If the turnover ratio increases by 30% and the margin increases by 20%, the overall increase in ROI would be (1.3 * 1.2) - 1 = 0.56 or 56%.

Question 7

If the National Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,the return on investment would be
A)23.8%.
B)420.0%.
C)42.0%.
D)238.0%.

Accepted Answer

The return on investment (ROI) can be calculated using the formula:

ROI = Margin x Turnover Ratio

Substituting the values given in the question, we get:

ROI = 0.10 x 4.2 = 0.42

Therefore, the ROI is 42.0%. The correct answer is choice C.

Question 8

The manager of a division is displeased with the ROI of the division.One step that would increase ROI (holding everything else constant)is
A)increasing investment.
B)increasing sales.
C)increasing costs.
D)decreasing operating income.
E)none of these.

Accepted Answer

Increasing sales would increase the numerator in the ROI equation (Operating income/Investment), while holding the denominator constant. Therefore, ROI would increase. Increasing investment (choice A) or increasing costs (choice C) would decrease ROI, and decreasing operating income (choice D) would have a negative impact on ROI. None of these options would result in an increase in ROI except for choice B.

Question 9

If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent,the ROI would
A)increase by 10 percent.
B)decrease by 10 percent.
C)increase by 15 percent.
D)remain the same.

Accepted Answer

The ROI (Return on Investment) is calculated as the product of the margin and the turnover ratio. If the turnover ratio increases by 10 percent, the ROI will also increase by 10 percent, assuming the margin remains constant.

Question 10

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is
A)responsibility accounting.
B)controllable accounting.
C)decentralization.
D)optimal strategic accounting.
E)none of these.

Accepted Answer

Decentralization is the decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility. Responsibility accounting, controllable accounting, and optimal strategic accounting are all related concepts, but they do not specifically refer to decentralized decision-making.

Question 11

Division A had ROI of 15% last year.The manager of Division A is considering an additional investment for the coming year.What step will the manager likely choose to take?
A)Accept the investment as long as it provides positive operating income.
B)Accept the investment as long as its ROI is positive.
C)Reject the investment if it returns more than 15% ROI.
D)Reject the investment if it returns less than 15% ROI.
E)Reject the investment if it returns an ROI equal to 15%.

Accepted Answer

The manager of Division A should only accept the investment if it returns a ROI of at least 15% (i.e., greater than or equal to the ROI of the previous year). Therefore, the manager should reject the investment if it returns less than 15% ROI. Option D is the correct choice as it aligns with this strategy. Option A and B are too lenient as they accept investments even if they generate low ROI, and option E is too strict as it rejects any investment that provides a ROI of 15%. Option C is not recommended as it may lead to missed opportunities for good investments.

Question 12

A segment of Mega Inc.,manufactures and sells blankets.The various models of blankets are produced in a single factory using stable technology.They are sold by the sales department,also located in the factory.The segment is most probably accounted for as a(n)
A)cost center.
B)revenue center.
C)profit center.
D)investment center.
E)none of these.

Accepted Answer

The segment's sales department generates revenue, and the segment itself is responsible for covering all costs associated with producing and selling the blankets, so it can be considered a profit center.

Question 13

A positive result that stems from the use of return on investment (ROI)is that it encourages managers to focus on
A)the relationship among sales,expenses,and investment.
B)cost efficiency.
C)operating asset efficiency.
D)the efficient use of resources in generating income.
E)all of these.

Accepted Answer

ROI encourages managers to focus on all of these aspects, as it is a performance measure that evaluates the efficiency of an investment and takes into account both the cost and return. By analyzing ROI, managers can identify areas where sales can be increased, expenses can be reduced, investments can be adjusted, and resources can be allocated more effectively. Therefore, all of the choices are valid options.

Question 14

Castor Company had income of $10,000,average assets of $100,000 and sales of $40,000.What is Castor's ROI?
A)10%
B)20%
C)25%
D)0.4%
E)40%

Accepted Answer

ROI (Return on Investment) is calculated as (Net Income / Average Assets) * 100. So, for Castor Company, it's ($10,000 / $100,000) * 100 = 10%.

Question 15

JetSky Airways has three divisions,the Western Division,the Eastern Division,and the Northern Division.The manager of the Western Division had wanted to purchase replacement airplanes for the division.However,he decided against it because,although revenues would increase and the new planes would be less expensive to operate,the initial cost of the planes was quite large.The Western Division is most probably accounted for as a(n)
A)cost center.
B)investment center.
C)profit center.
D)revenue center.
E)none of these.

Accepted Answer

The Western Division is likely an investment center because the manager is considering both the costs and revenues, indicating responsibility for both profits and investments.

Question 16

Margin is calculated as
A)operating income/sales.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/average operating assets operating income/sales.

Accepted Answer

The answer of Margin is calculated as
A)operating income/sales.
B)average operating assets/operating...

Question 17

Beta Division had the following information:  If the asset base is decreased by $100,000,with no other changes,the return on investment of Beta Division will be
A)100.0%.
B)16.7%.
C)600.0%.
D)62.5%.

Accepted Answer

The answer of Beta Division had the following information: ...

Question 18

Which of the following is not a disadvantage of the ROI performance measure?
A)It encourages managers to focus on the long run rather than the short run.
B)It discourages managers from investing in projects that would decrease divisional ROI but increase the profitability of the company as a whole.
C)It encourages myopic behavior.
D)All of these are disadvantages of the ROI measure.

Accepted Answer

Option A is not a disadvantage of the ROI performance measure. Instead, ROI encourages managers to focus on the short run rather than the long run because their performance is being measured based on the profitability generated in the short run. Options B and C are disadvantages of the ROI measure. Therefore, the correct answer is Option A.

Question 19

Which of the following is not an advantage of ROI?
A)It encourages managers of departments with high ROIs to invest in average ROI projects.
B)It encourages managers to pay careful attention to the relationships among sales,expenses,and investment.
C)It encourages cost efficiency.
D)It discourages excessive investment in operating assets.

Accepted Answer

ROI encourages managers to invest in projects with high ROIs, not average ROIs. Therefore, it does not necessarily encourage managers of departments with high ROIs to invest in average ROI projects.

Question 20

Turnover is calculated as
A)operating income/average operating assets.
B)average operating assets/operating income.
C)(beginning operating assets + ending operating assets)/2.
D)sales/average operating assets.
E)operating income/sales.

Accepted Answer

Turnover is calculated as sales divided by average operating assets. Choice D is the only option that matches this calculation.

Quiz 12: Performance Evaluation and Decentralization

Return on investment (ROI) is calculated as

Decentralization is frequently chosen by companies because it

Which of the following is a disadvantage of a focus on return on investment?

If the operating asset turnover increased by 50 percent and the margin increased by 50 percent,the ROI would increase by

Shandling Company had operating income of $70,000,sales of $218,750,and turnover of 0.5.What is Shandling's ROI?

If the operating asset turnover ratio increased by 30 percent and the margin increased by 20 percent,the divisional ROI

If the National Division of American Products Company had a turnover ratio of 4.2 and a margin of 0.10,the return on investment would be

The manager of a division is displeased with the ROI of the division.One step that would increase ROI (holding everything else constant) is

If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent,the ROI would

The decision-making approach that allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility is

Division A had ROI of 15% last year.The manager of Division A is considering an additional investment for the coming year.What step will the manager likely choose to take?

A segment of Mega Inc.,manufactures and sells blankets.The various models of blankets are produced in a single factory using stable technology.They are sold by the sales department,also located in the factory.The segment is most probably accounted for as a(n)

A positive result that stems from the use of return on investment (ROI) is that it encourages managers to focus on

Castor Company had income of $10,000,average assets of $100,000 and sales of $40,000.What is Castor's ROI?

Margin is calculated as

Beta Division had the following information: If the asset base is decreased by $100,000,with no other changes,the return on investment of Beta Division will be

Which of the following is not a disadvantage of the ROI performance measure?

Which of the following is not an advantage of ROI?

Turnover is calculated as