Question 1

When evaluating managerial actions, which of the following alternate measures overcomes many of the problems with ROI?

Accepted Answer

Residual income and EVA both account for the cost of capital, which ROI does not. Additionally, residual income uses a specific target rate of return to evaluate performance, while EVA uses a company's overall cost of capital. Both measures provide a more accurate picture of a manager's effectiveness in generating profit above and beyond the cost of capital.

Question 2

What advantage does the DuPont model offer compared to the standard ROI calculation?

Accepted Answer

The DuPont model breaks down Return on Investment (ROI) into components (profit margin, asset turnover, and financial leverage), which helps in identifying specific areas of strength and weakness. This detailed breakdown allows businesses to pinpoint specific actions needed to improve overall ROI.

Question 3

ABC Corporation's North Division generates operating income of $100,000 on $900,000 in sales.The company had $400,000 in assets at the beginning of the year and $450,000 at the end of the year.What is the company's return on investment for the year?

Accepted Answer

The answer of ABC Corporation's North Division generates operating income...

Question 4

Ronaldi Corporation's Port division has a segment margin of $400,000 and net sales revenue of $4,400,000 for the current reporting period.The division has an asset turnover of 1.5.What is the division's ROI?

Accepted Answer

ROI = Segment Margin / Net Sales Revenue * Asset Turnover= $400,000 / $4,400,000 * 1.5= 13.6%

Question 5

To increase both margin and asset turnover, a manager must

Accepted Answer

Increasing sales revenue would increase both margin and asset turnover. Margin is calculated as revenue minus expenses, so increasing revenue would increase the margin if expenses remain constant. Asset turnover is calculated as revenue divided by assets, so increasing revenue would increase asset turnover if assets remain constant. Decreasing expenses could increase margin, but would decrease asset turnover if revenue remains constant. Increasing expenses or decreasing sales revenue would have the opposite effect on both margin and asset turnover.

Question 6

Breton Corporation's Longboat division's segment margin as a percentage of net sales is 12% for the current reporting period.The division has net sales revenue of $2,500,000.Operating assets were $800,000 at the beginning of the period and $1,200,000 at the end.What is the division's asset turnover?

Accepted Answer

The answer of Breton Corporation's Longboat division's segment margin as...

Question 7

Cleopatra Corporation's Lingerie division has a segment margin of $729,000 and net sales revenue of $5,400,000 for the current reporting period.Average total assets for the period were $3,375,000.The division manager is considering implementing a new inventory system which would reduce inventory by $675,000.Assuming no change in sales or segment margin, the projected ROI with the reduction in inventory would be

Accepted Answer

ROI = Segment Margin / Average Total Assets
ROI before the inventory reduction = $729,000 / $3,375,000 = 21.6%
ROI after the inventory reduction = $729,000 / ($3,375,000 - $675,000) = 24%
Therefore, the projected ROI with the reduction in inventory would be 24%. The best choice is D.

Question 8

ROI will not be improved by

Accepted Answer

Converting variable costs to traceable fixed costs may increase profitability, but it would not necessarily lead to an improvement in ROI. ROI is dependent on both net income and invested capital, and simply changing the cost structure may not have a significant impact on either of these components. Increasing revenue, decreasing assets, and decreasing variable costs can all contribute to an improvement in ROI.

Question 9

Which of the following is a shortcoming of ROI as a performance measure?

Accepted Answer

ROI can increase without any change in operations because of depreciation, which inflates profits and thus makes the performance seem better than it actually is.

Question 10

The income that is earned above the specified minimum level of return is referred to as

Accepted Answer

Residual income refers to the income that is earned above the specified minimum level of return. EVA (Economic Value Added) refers to the difference between the cost of capital and the earned rate of return, segment income refers to the income earned in a specific segment or division, and operating income refers to the income earned from regular business operations.

Question 11

Noble Corporation had sales of $3,000,000 and operating income of $500,000.Noble also had $900,000 of assets on January 1 and $800,000 on December 31.What is the corporation's ROI for the year?

Accepted Answer

The answer of Noble Corporation had sales of $3,000,000 and...

Question 12

Blanco Corporation's Cajun Spice division has a segment margin is $432,500 for the current reporting period.The division has an asset turnover of 1.6.Segment margin as a percentage of sales is 10%.What is the division's ROI?

Accepted Answer

ROI is calculated as the segment margin divided by the assets. Given the asset turnover is 1.6 and the segment margin as a percentage of sales is 10%, we can find the sales and then the assets. Sales = $432,500 / 0.1 = $4,325,000. Assets = Sales / Asset Turnover = $4,325,000 / 1.6 = $2,703,125. ROI = Segment Margin / Assets = $432,500 / $2,703,125 = 16%.

Question 13

Which of the following is the formula to calculate residual income?

Accepted Answer

Residual income is calculated by subtracting the product of the average assets and the required minimum rate of return from the operating income. This formula is represented as Operating income - (average assets × required minimum rate of return). Option C is the only choice that matches this formula.

Question 14

Holding all other things equal, the ROI is affected by a change in

Accepted Answer

The answer of Holding all other things equal, the ROI...

Question 15

Althea Corporation's Perfume division has a segment margin is $85,000 for the current reporting period.Total assets at the beginning of the period were $800,000 and $900,000 at the end of the period.What is the division's ROI?

Accepted Answer

The answer of Althea Corporation's Perfume division has a segment...

Question 16

If managers want to increase ROI, an increase in sales revenue will increase

Accepted Answer

Margin is the profit margin, which is calculated as (Revenue - Cost of Goods Sold)/Revenue. Increasing sales revenue will increase the numerator of this equation and therefore increase the profit margin. Asset turnover is the measure of how efficiently a company uses its assets to generate revenue, calculated as Revenue/Total Assets. Increasing sales revenue will increase the numerator of this equation and therefore increase asset turnover. Therefore, an increase in sales revenue will increase both margin and asset turnover, leading to an increase in ROI. Total assets, on the other hand, are not directly affected by an increase in sales revenue.

Question 17

ROI can be improved by

Accepted Answer

ROI (Return on Investment) can be improved by decreasing assets and expenses, which increases the efficiency of asset use and reduces costs, respectively, leading to a higher return.

Question 18

Breton Corporation's Longboat division's segment margin as a percentage of net sales is 12% for the current reporting period.The division has net sales revenue of $2,500,000.Operating assets were $800,000 at the beginning of the period and $1,200,000 at the end.What is the division's ROI?

Accepted Answer