Question 1

The minimum acceptable divisional income from operations is set by top management by establishing a minimum rate of return considered acceptable for invested assets.

Accepted Answer

This statement is true. Top management sets a minimum rate of return that must be met by the division's income from operations in order to ensure that the division is generating sufficient returns on the assets that have been invested in it.

Question 2

In rate of return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets.

Accepted Answer

The investment turnover component measures how efficiently assets are being used to generate sales, and reflects the rate at which sales are being generated for each dollar of invested assets. Therefore, the statement is true.

Question 3

By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals which will increase the overall rate of return for the company.

Accepted Answer

The answer of By using the rate of return on...

Question 4

If divisional income from operations is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 8%, the residual income is $68,000.

Accepted Answer

Residual income is calculated as divisional income from operations minus (invested assets times minimum rate of return).

Therefore, residual income = $100,000 - ($850,000 x 0.08) = $32,000, not $68,000.

Question 5

If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3.

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets.

Investment turnover = Sales / Invested assets

Substituting the given values,

Investment turnover = $975,000 / $750,000 = 1.3

Therefore, the statement is true.

Question 6

The ratio of income from operations to sales is termed the profit margin component of the rate of return on investment.

Accepted Answer

The profit margin component of the rate of return on investment is the ratio of income from operations to sales.

Question 7

If divisional income from operations is $75,000, invested assets are $737,500, and the minimum rate of return on invested assets is 6%, the residual income is $36,750.

Accepted Answer

The answer of If divisional income from operations is $75,000,...

Question 8

If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Accepted Answer

Profit margin is calculated by dividing income from operations by sales, and multiplying by 100.

Profit margin = (Income from operations / Sales) * 100

Using the given numbers:

Profit margin = (5,000 / 30,000) * 100 = 16.67%

Therefore, the statement is false.

Question 9

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets. In this case, 30,000 divided by 25,000 equals 1.2.

Question 10

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum rate of return on investment but also the total magnitude of income from operations earned by each division.

Accepted Answer

Residual income takes into account both the minimum required rate of return as well as the total income earned by a division, making it a more comprehensive performance measure than just looking at one aspect.

Question 11

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5.

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets. In this case, investment turnover would be 1.2 ($30,000/$25,000), not 5.

Question 12

If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Accepted Answer

Profit margin is calculated as Income from operations/Sales. 
So, in this case, Profit margin = 6,000/30,000 = 0.2 or 20%.

Question 13

The profit margin component of rate of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.

Accepted Answer

This statement is true. The profit margin component of rate of return on investment analysis looks at how much profit is earned for every dollar of sales. It is calculated by dividing net profit by total revenue.

Question 14

The major advantage of the rate of return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated.

Accepted Answer

The rate of return on investment takes into account the divisional investment and thus provides a better measure for comparing divisions. Income from operations only considers the revenue and expenses associated with the division, which may not accurately reflect the division's overall performance.

Question 15

The ratio of sales to investment is termed the rate of return on investment.

Accepted Answer

The answer of The ratio of sales to investment is...

Question 16

The excess of divisional income from operations over a minimum acceptable income from operations is termed the residual income.

Accepted Answer

This is correct. Residual income is the excess of divisional income from operations over a minimum acceptable income from operations.

Question 17

A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable rate of return on assets set by upper management.

Accepted Answer

The residual income performance measure actually encourages managers to strive for higher returns on assets than the minimum acceptable rate set by upper management, as this will result in a higher residual income.

Question 18

The minimum accepted divisional income from operations is set by top management by establishing a maximum rate of return considered acceptable for invested assets.

Accepted Answer

The minimum accepted divisional income from operations is actually determined by setting a minimum rate of return considered acceptable for invested assets, not a maximum. This establishes the performance benchmark for divisions.

Question 19

The ratio of sales to invested assets is termed the investment turnover component of the rate of return on investment.

Accepted Answer

This statement is true. The investment turnover component of the rate of return on investment is calculated by dividing sales by invested assets.

Question 20

If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

Accepted Answer

Investment turnover is calculated as sales divided by invested assets, so $263,750 / $187,500 = 1.41.

Quiz 9: Evaluating Decentralized Operations