Question 1

Return on investment is calculated by dividing

Accepted Answer

Return on investment (ROI) is calculated by dividing the controllable margin (or net operating income) by the average operating assets. This measures the efficiency with which a company uses its assets to generate earnings.

Question 2

Which statement is true?

Accepted Answer

An investment center is responsible for revenues and expenses, as well as earning a return on assets. This means that it is not only responsible for its investments, but also for generating revenue and managing expenses. Additionally, it is evaluated based on its ROI, which takes into account both profits and assets used to generate those profits.

Question 3

Naples, Inc.recorded operating data for its shoe division for the year. $$\begin{array} { l r } 
\text { Sales } & \$ 750,000 \
\text { Contribution margin } & 135,000 \
\text { Total fixed costs } & 90,000 \
\text { Average total operating assets } & 300,000
\end{array}$$ How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?

Accepted Answer

The ROI is calculated as (Net Operating Income / Average Operating Assets) * 100. The initial contribution margin is $135,000, and with an improvement of $30,000, it becomes $165,000. Subtracting fixed costs of $90,000 gives a net operating income of $75,000. Thus, ROI = ($75,000 / $300,000) * 100 = 25%.

Question 4

A measure frequently used to evaluate the performance of the manager of an investment center is

Accepted Answer

The rate of return on funds invested in the center is an important measure as it takes into account both the profits generated and the amount of capital invested in the center. It provides a better understanding of the efficiency of the manager in utilizing resources to generate profits. The other options like the amount of profit generated or the percentage increase in profit over the previous year are not sufficient in measuring the efficiency of the manager as they do not take into account the amount of capital invested. Departmental gross profit is also not an appropriate measure as it does not take into account the investment made by the company in the center.

Question 5

A distinguishing characteristic of an investment center is that

Accepted Answer

An investment center is a responsibility center that is responsible for investing funds in profitable projects and generating a return on the investment. The profitability of the center is directly related to the funds invested in it, making it a distinguishing characteristic. Option A is not correct because selling and buying stocks and bonds is only one type of investment that an investment center may engage in. Option B is not correct because interest revenue may not be the major source of revenue for an investment center. Option D is not correct because an investment center is responsible for both generating revenues and managing investments.

Question 6

The denominator in the formula for return on investment calculation is

Accepted Answer

The denominator in the ROI formula is the investment center average operating assets. This includes all the assets that the investment center uses to generate its income, such as property, plant, and equipment, inventory, and receivables. The investment center controllable margin is the numerator in the ROI formula, as it represents the income that the investment center generates from its operations that it can control. The ROI formula is a standardized method of measuring how well an investment center is using its assets to generate income for the organization. Therefore, the correct answer is option C.

Question 7

Grown Industries reported the following items for 2016: $\begin{array}{lr}
\text { Income tax expense } & \$ 60,000 \
\text { Contribution margin } & 200,000 \
\text { Controllable fixed costs } & 80,000 \
\text { Interest expense } & 40,000 \
\text { Total operating assets } & 650,000
\end{array}$ How much is controllable margin?

Accepted Answer

Controllable margin is calculated as Contribution Margin minus Controllable Fixed Costs. Thus, $200,000 - $80,000 = $120,000.

Question 8

The Fulmar Division of Jayne Manufacturing had an ROI of 25% when sales were $3 million and controllable margin was $600,000.What were the average operating assets?

Accepted Answer

ROI = Controllable Margin ÷ Average Operating Assets

25% = $600,000 ÷ Average Operating Assets

Average Operating Assets = $2,400,000

Question 9

The current controllable margin for Henry Division is $93,000.Its current operating assets are $300,000.The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000.If the equipment is purchased, what will happen to the return on investment for Henry Division?

Accepted Answer

Firstly, let's calculate the current ROI for Henry Division:

ROI = Controllable Margin / Operating Assets
ROI = $93,000 / $300,000
ROI =  0.31 or 31%

After purchasing the equipment, the new controllable margin will be:
New Controllable Margin = $93,000 + $15,000 = $108,000

And the new ROI will be:
New ROI = New Controllable Margin / Operating Assets
New ROI = $108,000 / $300,000
New ROI = 0.36 or 36%

The percentage increase in ROI can be calculated as follows:
Percentage Increase = (New ROI - Current ROI) / Current ROI x 100%
Percentage Increase = (0.36 - 0.31) / 0.31 x 100%
Percentage Increase = 16.1%

Therefore, the answer is C) A decrease of 3.3%. This is clearly incorrect because we have calculated that the ROI will actually increase by 16.1%. The correct answer is A) An increase of 16.1%.

Question 10

Bogey Co.recorded operating data for its Cheap division for the year.Bogey requires its return to be 10%. $\begin{array}{lr}
\text { Sales } & \$ 1,400,000 \
\text { Controllable margin } & 160,000 \
\text { Total average assets } & 4,000,000 \
\text { Fixed costs } & 100,000
\end{array}$ What is the ROI for the year?

Accepted Answer

The answer of Bogey Co.recorded operating data for its Cheap...

Question 11

Benet Division of United Refinery Company's operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000.The Benet Division's ROI is 25%.Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000.Should management accept this new project?

Accepted Answer

The ROI of the Benet Division will decrease if the new project is accepted because the project has a lower ROI than the division's current ROI of 25%. As a result, accepting the project would lead to a decrease in the division's overall profitability.

Question 12

The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives.The required investments, expected controllable margins, and the ROIs of each are as follows: $\begin{array}{lllr}\text { Project }&\text { Investment }&\text { Controllable Margin }&ROI\
\text { Phoenix } & \$ 120,000 & \$ 30,000 & 25 \% \
\text { Chicago } & \$ 540,000 & \$ 50,000 & 9.25 \%
\end{array}$ The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000.Which one of following projects will increase the Red, White, and Brew division's ROI?

Accepted Answer

The current ROI is 12.5% ($250,000 / $2,000,000). The Phoenix project has an ROI of 25%, which is higher than the current ROI, so it will increase the division's ROI. The Chicago project has an ROI of 9.25%, which is lower than the current ROI, so it will decrease the division's ROI.

Question 13

Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI.The current controllable margin for Pika Division is $46,000.Its current operating assets total $210,000.The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000.If the equipment is purchased, what will happen to the return on investment for the division?

Accepted Answer

The current ROI is calculated as $46,000 / $210,000 = 21.9%. After purchasing the equipment, the new controllable margin remains the same ($46,000 - $10,000 depreciation + $10,000 additional sales = $46,000), but the operating assets increase to $250,000 ($210,000 + $40,000). The new ROI is $46,000 / $250,000 = 18.4%. The change in ROI is a decrease of 3.5% (21.9% - 18.4%).

Question 14

Rhein Manufacturing recorded operating data for its auto accessories division for the year. $$\begin{array} { l r } 
\text { Sales } & \$ 750,000 \
\text { Contribution margin } & 150,000 \
\text { Total direct fixed costs } & 90,000 \
\text { Average total operating assets } & 400,000
\end{array}$$ How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?

Accepted Answer

The ROI is calculated as (Net Operating Income / Average Operating Assets). The improved contribution margin is $150,000 + $30,000 = $180,000. Net Operating Income is $180,000 - $90,000 = $90,000. ROI = $90,000 / $400,000 = 22.5%.

Question 15

If an investment center has generated a controllable margin of $150,000 and sales of $600,000, what is the return on investment for the investment center if average operating assets were $1,000,000 during the period?

Accepted Answer

The return on investment (ROI) is calculated by dividing the controllable margin by the average operating assets. Here, it's $150,000 / $1,000,000 = 0.15 or 15%.

Question 16

Griffin Corp.is evaluating its Piquette division, an investment center.The division has a $60,000 controllable margin and $400,000 of sales.How much will Griffin's average operating assets be when its return on investment is 10%?

Accepted Answer

The average operating assets will be $600,000 when the return on investment (ROI) is 10%. ROI is calculated as Controllable Margin / Average Operating Assets. Given a controllable margin of $60,000 and an ROI of 10%, we solve for Average Operating Assets: $60,000 / 0.10 = $600,000.

Question 17

Which one of the following will not increase return on investment?

Accepted Answer

Increasing variable costs will decrease the amount of revenue left over after expenses, resulting in a lower return on investment. Therefore, it is the option that will not increase return on investment. B, C, and D would all lead to a higher return on investment: an increase in sales would increase revenue, decreasing average operating assets would increase the return on those assets, and decreasing variable costs would increase the amount of revenue left over after expenses.

Question 18

An investment center generated a contribution margin of $400,000, fixed costs of $200,000 and sales of $2,000,000.The center's average operating assets were $800,000.How much is the return on investment?

Accepted Answer

Return on Investment = Contribution Margin / Average Operating Assets
= $400,000 / $800,000
= 0.5 or 50%
However, to convert it to a percentage, we need to multiply by 100
= 50% 
Therefore, the correct answer is A) 25%.

Question 19

Monte, Inc.recorded operating data for its Sandtrap division for the year.Monte requires its return to be 9%. $\begin{array}{lr}
\text { Sales } & \$ 1,000,000 \
\text { Controllable margin } & 180,000 \
\text { Total average assets } & 600,000 \
\text { Fixed costs } & 60,000
\end{array}$ How much is ROI for the year?

Accepted Answer

The answer of Monte, Inc.recorded operating data for its Sandtrap...

Question 20

Dingo Division's operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000.Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000.Dingo's required rate of return is 9%.Should Dingo accept this project?

Accepted Answer

To determine if the project should be accepted, we need to calculate the ROI of the project and compare it to Dingo's required rate of return of 9%.

Controllable Margin = Sales - Variable Expenses
Controllable Margin = $100,000 - $86,000
Controllable Margin = $14,000

ROI = Controllable Margin / Average Operating Assets

ROI = $14,000 / $200,000
ROI = 7%

Since the ROI of the project is less than Dingo's required rate of return of 9%, the project should not be accepted. Therefore, the answer is B.

Quiz 10: Reporting and Analyzing Liabilities