Question 1

Return on investment (ROI)equals margin multiplied by sales.

Accepted Answer

ROI equals net income divided by total investment. The formula mentioned in the statement is incorrect.

Question 2

The use of return on investment (ROI)as a performance measure may lead managers to reject a project that would be favorable for the company as a whole.

Accepted Answer

ROI only considers financial returns and does not take into account other benefits that a project may bring to the company such as increased market share, enhanced brand value or improved customer satisfaction. This may lead managers to reject projects that have a low ROI but are beneficial for the company's long-term success.

Question 3

Move time is considered non-value-added time.

Accepted Answer

Move time refers to the time taken to move a product or tool from one location to another, which does not directly contribute to the production process and is therefore considered non-value-added time.

Question 4

A manager would generally like to see a trend indicating a decrease in setup time.

Accepted Answer

A decrease in setup time means that the production process is becoming more efficient, which is generally desirable for a manager.

Question 5

Net operating income is income before interest and taxes.

Accepted Answer

Net operating income (NOI) is a financial metric used in real estate to measure the profitability of income-generating properties, focusing on the property's ability to generate income from operations, excluding financing costs and taxes. However, in a broader business context, the term often confused with NOI is EBIT (Earnings Before Interest and Taxes), which directly refers to a company's income excluding interest and taxes. The question's phrasing aligns more closely with the definition of EBIT in a general business context, despite using the term "net operating income."

Question 6

If a company contains a number of investment centers of differing sizes,return on investment (ROI)should be used rather than residual income to rank the financial performance of the divisions.

Accepted Answer

ROI is a more appropriate measure for comparing the performance of investment centers of differing sizes, as residual income can be biased towards larger centers with higher absolute profits. ROI provides a more standardized measure of profitability by calculating the return on investment as a percentage, regardless of the size of the center.

Question 7

An advantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income.

Accepted Answer

This statement is true. ROI (Return on Investment) is calculated by dividing net operating income by the average operating assets. By increasing net operating income while reducing the investment in operating assets, the ROI can be increased. Thus, using ROI as a performance measure encourages managers to focus on maximizing profits while minimizing their investment in assets.

Question 8

All other things the same,an increase in unit sales will normally result in an increase in the return on investment.

Accepted Answer

When unit sales increase, revenue also increases, which can lead to higher profits and a higher return on investment.

Question 9

Throughput time is the amount of time required to move a completed unit from the factory floor to the warehouse.

Accepted Answer

Throughput time is the amount of time it takes for a product to go through the production process from start to finish, including processing, inspection, and any waiting times, not just the time to move a completed unit to the warehouse.

Question 10

A change in sales has no effect on margin and turnover.

Accepted Answer

Sales, margin and turnover are interconnected. A change in sales can lead to a change in margin and turnover. For example, if sales increase, it can lead to an increase in turnover but may not necessarily lead to an increase in margin. On the other hand, if sales decrease, it can lead to a decrease in turnover and margin.

Question 11

Residual income is the difference between net operating income and the product of average operating assets and the minimum rate of return.

Accepted Answer

This is the correct definition of residual income.

Question 12

Residual income should be used to evaluate an investment center rather than a cost or profit center.

Accepted Answer

Residual income is a measure of the value added by a business unit after accounting for the cost of capital. It focuses on how much economic profit is generated by the investment center. Therefore, it is a better measure to evaluate an investment center than a cost or profit center.

Question 13

A manufacturing cycle efficiency (MCE)of less than one is impossible.

Accepted Answer

Manufacturing Cycle Efficiency (MCE) is calculated as the value-added time divided by the total cycle time. Since value-added time is often much less than the total cycle time, MCE values less than one are not only possible but common.

Question 14

When used in return on investment (ROI)calculations,turnover equals sales divided by average operating assets.

Accepted Answer

Turnover is commonly used in ROI calculations and is calculated by dividing sales by average operating assets.

Question 15

Suppose a company evaluates divisional performance using both ROI and residual income.The company's minimum required rate of return for the purposes of residual income calculations is 12%.If a division has a residual income of $6,000,then its ROI is less than 12%.

Accepted Answer

Residual income is calculated by subtracting the product of the minimum required rate of return (in this case, 12%) and the operating assets from the division's operating income. A positive residual income indicates that the division's ROI is greater than the company's minimum required rate of return of 12%, not less.

Question 16

A manufacturing cycle efficiency (MCE)ratio of less than 1.00 is desirable because this is the ratio of non-value-added time to throughput time.

Accepted Answer

A manufacturing cycle efficiency (MCE) ratio less than 1.00 indicates that there is more non-value-added time than added time, which is not desirable. A MCE ratio of 1.00 or higher is desirable as it indicates that the manufacturing process is operating efficiently with minimal non-value-added time.

Question 17

If the MCE is equal to 0.6,then 60% of the time a unit is in process is spent on activities that add value to the product.

Accepted Answer

The MCE (Manufacturing Cycle Efficiency) measures the percentage of time spent adding value in a production process. If the MCE is 0.6, then it means that 60% of the time spent in the process is dedicated to adding value to the final product, thus making option A true.

Question 18

ROI and residual income are tools used to evaluate managerial performance in investment centers.

Accepted Answer

Both ROI and residual income are commonly used metrics for evaluating the performance of investment centers and their managers. ROI (Return on Investment) measures the amount of return generated by an investment in relation to the amount of resources invested, while residual income measures the amount of income generated by an investment center beyond what is required to earn a minimum rate of return. Both metrics are used to assess the efficiency and effectiveness of managers in using resources to generate profits.

Question 19

Residual income can be used most effectively in comparing the performance of divisions of different size.

Accepted Answer

The answer of Residual income can be used most effectively...

Question 20

Land held for possible plant expansion would be included as an operating asset when computing return on investment (ROI).

Accepted Answer

Land held for possible plant expansion is considered an investment for future use, not currently used in operations, and therefore not included in operating assets for the purpose of computing ROI.

Quiz 11: Performance Measurement in Decentralized Organizations