Question 1

Residual income is an example of a ____ performance measurement.
A) long-term
B) short-term
C) qualitative
D) profit center

Accepted Answer

Residual income is considered a short-term performance measurement because it evaluates the performance of a business or investment over a relatively short period, typically within a fiscal year, focusing on the income generated beyond the minimum required return.

Question 2

If a division generates a positive residual income then the division's
A) asset turnover was very high.
B) profitability was greater than that of other divisions in the company.
C) performance was above expectations.
D) actual return on investment exceeds the division's target return.

Accepted Answer

Positive residual income means that the actual return on investment (ROI) is higher than the target ROI, which indicates that the division is performing well and generating more profit than expected. Option A is incorrect because high asset turnover only measures how efficiently assets are being used to generate sales, not profitability. Option B may be true, but it is not the only reason for a positive residual income. Option C is too broad and does not necessarily explain why the residual income is positive.

Question 3

Profit margin equals
A) income divided by sales.
B) incomes divided by average inventory.
C) income divided by average assets.
D) income divided by average stockholder's equity.

Accepted Answer

Profit margin is calculated by dividing net income by sales revenue, indicating how much profit a company makes for each dollar of sales.

Question 4

An increase in a corporation's target rate would result in a(n)
A) increase in residual income.
B) decrease in return on investment.
C) decrease in residual income.
D) decrease in both residual income and return on investment.

Accepted Answer

An increase in the target rate means that the corporation has set a higher minimum rate of return that needs to be achieved. As a result, any investment or project that generates a return lower than the target rate would lead to a decrease in residual income, which is the income earned above the target rate. Therefore, the correct choice is C - a decrease in residual income.

Question 5

A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's sales and expenses both increase by $30,000, how will the following measures be affected? 
A) increase increase increase
B) indeterminate increase decrease
C) no change increase decrease
D) no change decrease no change

Accepted Answer

ROI (Return on Investment) is calculated by dividing net profit by total investment. As both sales and expenses increase by the same amount, there is no change in the net profit. Therefore, the ROI will remain the same. However, since expenses have increased, the profitability and efficiency of the sub-unit will decrease, leading to a decrease in other performance measures such as profit margin or asset turnover.

Question 6

Return on investment is computed by dividing income by
A) contribution margin.
B) inventory turnover.
C) assets invested.
D) average assets employed.

Accepted Answer

The answer of Return on investment is computed by dividing...

Question 7

The Du Pont model measures
A) residual income.
B) return on investment.
C) throughput.
D) profit.

Accepted Answer

The Du Pont model is used to measure the return on investment by breaking it down into three components: net profit margin, total asset turnover, and financial leverage. Therefore, the correct answer is B (return on investment).

Question 8

All other things being equal, an increase in sales price would increase
A) asset turnover.
B) profit margin.
C) residual income.
D) all of the above.

Accepted Answer

The answer of All other things being equal, an increase...

Question 9

A prospective project under consideration by the Internet Division of Communications Corporation. has an estimated residual income of $(20,000). If the project requires an investment of $400,000, the
A) project generates a negative return on investment.
B) project's return on investment is zero.
C) project's return on investment is 5% less than the company's target rate.
D) company's target rate is 15%

Accepted Answer

The answer of A prospective project under consideration by the...

Question 10

Residual income is used as a performance measure in
A) profit centers.
B) cost centers.
C) investment centers.
D) revenue centers.

Accepted Answer

Residual income is used as a performance measure in investment centers, which are responsible for managing investments in assets and generating returns on those investments. Profit centers are responsible for generating profits, cost centers for managing costs, and revenue centers for generating revenue. None of these centers involve managing investments and generating returns like investment centers do.

Question 11

Return on investment (ROI) is a term most often used to express income earned on assets invested in a business unit. A company's return on investment would increase if sales
A) increased by the same dollar amount as expenses and total assets increased.
B) remained the same and expenses were reduced by the same dollar amount that total assets increased.
C) decreased by the same dollar amount that expenses increased.
D) and expenses increased by the same percentage that total assets increased.

Accepted Answer

The answer of Return on investment (ROI) is a term...

Question 12

Presently, the Comic Book Division of Anderson Publishing Corporation has a profit margin of 30%. If total sales rise by $100,000, the net result will be
A) an increase in the profit margin ratio to above 30%.
B) a decrease in the profit margin ratio to below 30%.
C) no change in the profit margin ratio.
D) a change in the profit margin ratio that cannot be determined from this information.

Accepted Answer

Since the profit margin ratio is calculated by dividing net profit by total sales, an increase in total sales of $100,000 will not directly affect the profit margin ratio. Without information on how the increase in sales will impact expenses and net profit, it is not possible to determine if the profit margin ratio will increase, decrease, or remain the same. Thus, there will be no change in the profit margin ratio.

Question 13

If a new project generates a positive residual income, the
A) project's return on investment is less than the target rate.
B) project's return on investment is greater than the target rate.
C) project's return on investment is equal to the target rate.
D) relationship between the project's return on investment and the target rate cannot necessarily be determined.

Accepted Answer

A positive residual income indicates that the project is generating more income than the minimum required to cover costs and the investor's required return (target rate), which means that the project's return on investment is greater than the target rate.

Question 14

Profit margin indicates the portion of sales that
A) covers fixed expenses.
B) is not used to cover expenses.
C) equals contribution margin.
D) equals product contribution margin.

Accepted Answer

Profit margin is the percentage of sales that remain after all expenses, including variable and fixed expenses, have been deducted. Therefore, it represents the amount of sales revenue that is not used to cover expenses, making choice B the correct answer.

Question 15

Residual income is used as a performance measure in which of the following types of centers? 
A) yes no yes
B) yes yes yes
C) no yes yes
D) no yes no

Accepted Answer

The answer of Residual income is used as a performance...

Question 16

Residual income is determined as
A) income times the asset turnover rate.
B) income times the inventory turnover rate.
C) income minus (asset base times target rate of return).
D) sales minus (asset base times target rate of return).

Accepted Answer

Residual income is the amount of income that remains after deducting the minimum return required on the company's assets from its net operating income. This residual income is determined as income minus (asset base times target rate of return). Choice A and B are incorrect because they calculate turnover, not residual income. Choice D is incorrect because it calculates sales, not residual income.

Question 17

In the Du Pont model, profit margin is a ratio of
A) income to sales.
B) income to assets.
C) sales to income.
D) sales to assets.

Accepted Answer

Profit margin is calculated by dividing the net income by the total sales, making it the ratio of income to sales. The Du Pont model uses this ratio along with others to analyze the overall return on equity.

Question 18

Residual income is the
A) contribution margin of an investment center, less the imputed interest on the invested capital used by the center.
B) contribution margin of an investment center, plus the imputed interest on the invested capital used by the center.
C) income of an investment center, less the imputed interest on the invested capital used by the center.
D) income of an investment center, plus the imputed interest on the invested capital used by the center.

Accepted Answer

Residual income is the income of an investment center, less the imputed interest on the invested capital used by the center. It is used as a performance metric to evaluate the profitability of an investment center.

Question 19

The Du Pont model measures ROI as it is affected by
A) contribution margin and asset turnover.
B) profit margin and asset turnover.
C) asset turnover.
D) profit margin.

Accepted Answer

The Du Pont model measures ROI (return on investment) as the product of profit margin (net income/sales) and asset turnover (sales/average total assets). Therefore, B is the best choice as it includes both profit margin and asset turnover as factors affecting ROI. Choice A includes contribution margin, which is not part of the Du Pont model equation, while choices C and D include only one of the two factors in the equation.

Question 20

Which of the following would be an appropriate alternative to the use of ROI in evaluating the performance of an investment center? 
A) yes yes yes
B) no yes no
C) yes no no
D) yes no yes

Accepted Answer

The answer of Which of the following would be an...

Quiz 14: Performance Measurement, Balanced Scorecards, and Performance Rewards

Residual income is an example of a ____ performance measurement.

If a division generates a positive residual income then the division's

Profit margin equals

An increase in a corporation's target rate would result in a(n)

A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's sales and expenses both increase by $30,000, how will the following measures be affected?

Return on investment is computed by dividing income by

The Du Pont model measures

All other things being equal, an increase in sales price would increase

A prospective project under consideration by the Internet Division of Communications Corporation. has an estimated residual income of $(20,000) . If the project requires an investment of $400,000, the

Residual income is used as a performance measure in

Return on investment (ROI) is a term most often used to express income earned on assets invested in a business unit. A company's return on investment would increase if sales

Presently, the Comic Book Division of Anderson Publishing Corporation has a profit margin of 30%. If total sales rise by $100,000, the net result will be

If a new project generates a positive residual income, the

Profit margin indicates the portion of sales that

Residual income is used as a performance measure in which of the following types of centers?

Residual income is determined as

In the Du Pont model, profit margin is a ratio of

Residual income is the

The Du Pont model measures ROI as it is affected by

Which of the following would be an appropriate alternative to the use of ROI in evaluating the performance of an investment center?