Question 1

Joseph Company has an investment in assets of $450,000,operating income that is 10% of sales,and an ROI of 18%.From this information the amount of operating income would be:

Accepted Answer

ROI = Margin x Turnover
ROI = (Operating income ÷ Sales)x (Sales ÷ Operating assets)
18% = 10% x (Sales ÷ $450,000)
18% ÷ 10% = Sales ÷ $450,000
1.8 = Sales ÷ $45,000
Sales = $45,000 x 1.8= $81,000

Question 2

The Perez Company had a 12.5% return on a $100,000 investment in new equipment.The investment resulted in increased sales,and the resultant increase in income amounted to 5% of sales.The turnover (asset utilization)was:

Accepted Answer

ROI = Margin x Turnover
ROI = (Operating income ÷ Sales)x (Sales ÷ Operating assets)
12.5% = 5% x (Sales ÷ $100,000)
12.5% ÷ 5% = Sales ÷ $100,000
2.5 = Sales ÷ $100,000
Sales = $100,000 x 2.5 = $250,000
Turnover = Sales ÷ Operating assets
Turnover = $250,000 ÷ $100,000 = 2.5

Question 3

Ormand Organic Grocery has invested in a yogurt stand for its store.The investment cost the company $100,000.Variable materials,preparation,and marketing costs are expected to be $0.60 per unit and fixed costs are estimated at $6,000 a year.If actual sales were 20,000 servings,what would the ROI be using the sales price of $1.80?

Accepted Answer

ROI = Operating income ÷ Operating assets
ROI = [Sales - Variable costs - Fixed costs] ÷ Operating assets
ROI = [($1.80 per serving - $0.60 per serving)x 20,000 servings)] - $6,000] ÷ $100,000
ROI = [($1.20 per serving x 20,000 servings)- $6,000] ÷ $100,000
ROI = ($24,000 - $6,000)÷ $100,000 = $18,000 ÷ $100,000 = 18%

Question 4

Jacob is a department manager who recently instituted a new recognition program for his employees.He budgeted the cost of the new program at $10 per employee,but actual costs were $15 per employee.The cost associated with the recognition program would be considered which of the following kinds of cost?

Accepted Answer

The controllability concept is crucial to an effective responsibility accounting system.Managers should be evaluated based only on revenues or costs they control.This department manager has control over the costs of the new recognition program that he instituted.

Question 5

The Cineplex Movie Theater has invested in a snack bar for its store,where individual pizzas would be prepared and sold.The investment cost the company $45,000.The company expects a sales volume for the new product to be 12,000 pizzas a year.Variable materials,preparation,and marketing costs are expected to be $1.50 per unit and fixed costs are estimated at $15,000 a year.Based on a desired 12% ROI,what should Cineplex charge as the selling price per pizza?

Accepted Answer

Operating income = Sales - Variable costs - Fixed costs
Operating income = [(Price per pizza x 12,000 pizzas)- ($1.50 x 12,000 pizzas)- $15,000]
ROI = Operating income ÷ Operating assets
12% = [(Price per pizza x 12,000 pizzas)- ($1.50 x 12,000 pizzas)- $15,000] ÷ $45,000
$45,000 x 12% = [(Price per pizza x 12,000 pizzas)- ($1.50 x 12,000 pizzas)- $15,000]
$5,400 + $15,000 = [(Price per pizza x 12,000 pizzas)- ($1.50 x 12,000 pizzas)
$20,400 = (Price per pizza - $1.50 per pizza)x 12,000 pizzas
$20,400 ÷ 12,000 pizzas = (Price per pizza - $1.50 per pizza)
$1.70 per pizza = Price per pizza - $1.50 per pizza
$3.20 = Price per pizza

Question 6

Select the incorrect statement concerning the application of the controllability concept to responsibility accounting.

Accepted Answer

The controllability concept is crucial to an effective responsibility accounting system.Managers should be evaluated based only on revenues or costs they control.

Question 7

When using residual income as a project-screening tool,management should accept a project if the residual income is:

Accepted Answer

When the manager's evaluation is based on residual income,the manager is likely to accept the funds when the additional investment increases the residual income generated by the investment (that is,when the residual income is positive).

Question 8

Huang Company reported the following information for the current year: $\begin{array}{|l|lr|}
\hline \text { Sales } & \$ & 400,000 \
\hline \text { Average Operating Assets } & \$ & 250,000 \
\hline \text { Margin } & & 10 \% \
\hline
\end{array}$ The company's return on investment was:

Accepted Answer

Return on Investment (ROI) is calculated as Margin multiplied by Asset Turnover. Margin is given as 10%, and Asset Turnover is Sales divided by Average Operating Assets, which is 400,000 / 250,000 = 1.6. Therefore, ROI = 10% * 1.6 = 16%.

Question 9

Joseph Company reported the following information for the current year: $\begin{array}{|l|r|}
\hline \text { Sales } & \$ 787,000 \
\hline \text { Average Operating Assets } & \$ 375,000 \
\hline \text { Desired ROI } & 12 \% \
\hline \text { Residual Income } & \$ 11,250 \
\hline
\end{array}$ The company's operating income was:

Accepted Answer

The answer of Joseph Company reported the following information for...

Question 10

To avoid suboptimization,many companies prefer to evaluate their investment centers using:

Accepted Answer

Residual income takes into account the cost of capital and ensures that all investments contribute positively to overall company performance, rather than just meeting a certain threshold for return on investment. This helps avoid suboptimization where individual investment centers may focus on maximizing their own returns at the expense of the company as a whole.

Question 11

Which of the following statements about return on investment (ROI)is

Accepted Answer

ROI equals operating income divided by operating assets.

Question 12

Campbell Candy Corporation desires a 16% return on investment (ROI)on all operations.The following information was available for the company for the current year: $\begin{array}{|l|lr|}
\hline \text { Sales } & \$ & 250,000 \
\hline \text { Operating Income } & \$ & 70,000 \
\hline \text { Turnover } & & 0.6 \
\hline
\end{array}$ What is the corporation's ROI?

Accepted Answer

ROI = Operating Income / Sales * Turnover= 70,000 / 250,000 * 0.6= 0.168= 16.8%

Question 13

Payne Company reported the following information for the current year: $\begin{array}{|l|lr|}
\hline \text { Sales } & \$ & 1,600,000 \
\hline \text { Average Operating Assets } & \$ & 500,000 \
\hline \text { Desired ROI } & & 14 \% \
\hline \text { Net Income } & \$ & 85,000 \
\hline
\end{array}$ The company's residual income was:

Accepted Answer

Residual income is calculated as Net Income minus the product of Average Operating Assets and Desired ROI. Here, it is $85,000 - ($500,000 * 14%) = $85,000 - $70,000 = $15,000.

Question 14

Howard Company provided the following selected information about its consumer products division for the current year: $\begin{array}{|l|lr|}
\hline \text { Desired ROI } & & 12 \% \
\hline \text { Net Income } & \$ & 150,000 \
\hline \text { Residual Income } & \$ & 30,000 \
\hline
\end{array}$ Based on this information,the division's investment amount was:

Accepted Answer

Residual income is calculated as Net Income - (Desired ROI * Investment). Rearranging the formula to find the investment gives Investment = (Net Income - Residual Income) / Desired ROI. Substituting the given values: Investment = ($150,000 - $30,000) / 0.12 = $1,000,000.

Question 15

Fairpoint Products provided the following selected information about its consumer products division for the current year: $\begin{array}{|l|rr|}
\hline \text { Desired ROI } & & 8 \% \
\hline \text { Net Income } & \$ & 100,000 \
\hline \text { Residual Income } & \$ & 60,000 \
\hline
\end{array}$ Based on this information,the division's investment amount was:

Accepted Answer

Residual Income = Net Income - (Desired ROI x Investment)$60,000 = $100,000 - (0.08 x Investment)Investment = $1,250,000

Question 16

Which of the following would increase residual income? (Assume all other things are equal)

Accepted Answer

Residual income = Operating income - (Operating assets x Desired ROI)

Question 17

Stephanie's responsibility report includes the salary and benefits of her secretary.Although Stephanie prepares a performance evaluation for the secretary each year,Stephanie's superior determines how much the secretary will be paid.This example is an illustration of the fact that:

Accepted Answer

The controllability concept is crucial to an effective responsibility accounting system.Managers should be evaluated based only on revenues or costs they control.Since the exercise of control may be clouded,managers are usually held responsible for items over which they have predominant rather than absolute control.At times,responsibility accounting may be imperfect.Management must strive to ensure that praise or criticism is administered as fairly as possible.

Question 18

The Family Restaurant chain had a 12% return on a $60,000 investment in new ovens.The investment resulted in increased sales and an increase in income that was 3% of the increase in sales.The increase in sales was:

Accepted Answer

ROI = Operating income ÷ Operating assets
12% = (Sales x 3%)÷ $60,000
12% = (Sales x 3%)÷ $60,000
(3% x Sales)= 12% x $60,000
(3% x Sales)= $7,200
Sales = $7,200 ÷ 3% = $240,000

Question 19

Brookings Company evaluates its managers on the basis of return on investment.Division Three has a return on investment (ROI)of 15% while the company as a whole has an ROI of only 10%.Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

Accepted Answer

If the manager's evaluation is based solely on ROI,the manager is likely to reject the additional funding because investing the funds at 12% would lower his overall ROI,which was at 15%.On the other hand,if the manager's evaluation is based on residual income,however,the manager is likely to accept the project because an additional investment at 12% would increase the manager's residual income;that is,the manager would benefit by investing in any project that returns an ROI in excess of the corporate average of 10%.

Question 20

Willis Company made a $200,000 investment in new machinery.Assuming the company's margin is 4%,what income will be earned if the investment generates $600,000 in additional sales?

Accepted Answer

ROI = Margin x Turnover
ROI = 4% x ($600,000 ÷ $200,000)= 12%
ROI = Operating income ÷ Operating assets
12% = Operating income ÷ $200,000
Operating income = 12% x $200,000 = $24,000

Quiz 9: Responsibility Accounting