Question 1

Hargrave Products has three divisions, which operate autonomously. Their results for 20X5 were as follows:
  The company's desired rate of return is 15%.
Required:
a. Compute each division's ROI. Round to three decimal places.
b. Compute each division's residual income.

Accepted Answer

The answer of Hargrave Products has three divisions, which operate...

Question 2

Bob's Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years:
20X5 ROI = ($2,000,000/$20,000,000)× ($20,000,000/$10,000,000)= 0.20
20X6 ROI = ($2,400,000/$25,000,000)× ($25,000,000/$15,000,000)= 0.16
Corporate management was disappointed in the performance of the division for 20X6, since it had made an additional investment in the division that was budgeted for a 23% ROI.
Required:
a. Discuss some factors that may have contributed to the decrease in ROI for 20X6.
b. Would there have been any substantial difference if average capital had been used?

Accepted Answer

The answer of Bob's Cellular Phone Company uses ROI to...

Question 3

Answer the following questions using the information below:
Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009:
  The company is currently using a 12% required rate of return.
-What are Wheels's and Assembly's return on investment based on book values, respectively?
A)0.21; 0.25
B)0.25; 0.21
C)0.14; 0.25
D)0.25; 0.14

Accepted Answer

The answer of Answer the following questions using the information...

Question 4

When using the historical cost of assets for calculation of return on investment, is it better to use the gross book value of the assets or the net book value of the assets ? Discuss.

Accepted Answer

The answer of When using the historical cost of assets...

Question 5

Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centers in four divisions that operate autonomously. The company's results for 2008 are as follows:
  Required:
a. Compute Coptermagic's weighted average cost of capital.
b. Compute each division's Economic Value Added.
c. Rank the divisions by EVA.

Accepted Answer

The answer of Coptermagic Company supplies helicopters to corporate clients....

Question 6

Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base.

Accepted Answer

Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base.

Question 7

The cost today of purchasing an asset identical to the one currently held is called a(n):
A)actual cost
B)current cost
C)dual cost
D)fixed cost

Accepted Answer

The correct term for the cost of purchasing an identical asset to the one currently held is the current cost. Actual cost refers to the historical cost of acquiring the asset, dual cost is not a recognized term, and fixed cost refers to a cost that remains unchanged regardless of changes in production or sales levels.

Question 8

Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

Accepted Answer

Current cost return on investment takes into account the current market conditions and the current value of the investment, which provides a more accurate measure of the economic returns from the investment. Historical cost return on investment only considers the initial cost of the investment and does not reflect changes in the market or the asset's value over time.

Question 9

Answer the following questions using the information below:
Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009:
  The company is currently using a 12% required rate of return.
-What are Wheels's and Assembly's return on investment based on current values, respectively?
A)0.21; 0.25
B)0.25; 0.21
C)0.14; 0.25
D)0.25; 0.14

Accepted Answer

The answer of Answer the following questions using the information...

Question 10

The economic value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of performance.

Accepted Answer

The answer of The economic value added concept has attracted...

Question 11

Batman Abstract Company has three divisions that operate autonomously. Their results for 20X5 are as follows:
  The company's desired rate of return is 20%.
Required:
a. Compute each division's ROI.
b. Compute each division's residual income.
c. Rank each division by both ROI and residual income.
d. Which division had the best performance in 20X5? Why?

Accepted Answer

The answer of Batman Abstract Company has three divisions that...

Question 12

Using net book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet.

Accepted Answer

Net book value is calculated by subtracting the accumulated depreciation from the original cost of an asset. This is the same as the amount of total assets shown in the conventional balance sheet, which is the original cost of the assets minus the accumulated depreciation.

Question 13

A firm will see a difference in the return on investment amount depending if they use historical cost or current cost valuation methods for the assets.

Accepted Answer

The return on investment amount can differ depending on the valuation method used, as historical cost values assets at their original purchase price while current cost adjusts the value based on current market values. Depending on market fluctuations, the return on investment calculated using the two methods could be significantly different.

Question 14

Answer the following questions using the information below:
Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5:
  The company is currently using a 15% required rate of return.
-What are Bleach's and Cleanser's return on investment based on current values, respectively?
A)0.22; 0.67
B)0.42; 0.52
C)0.52; 0.42
D)0.67; 0.22

Accepted Answer

The answer of Answer the following questions using the information...

Question 15

Residual income calculations are similar to EVA® calculations because in each calculation there is a charge for the division's invested capital which is deducted from a measure of that division's profit.

Accepted Answer

Both residual income and EVA® calculations deduct a charge for the division's invested capital from a measure of profit to determine the amount of value created by the division.

Question 16

Answer the following questions using the information below:
Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5:
  The company is currently using a 15% required rate of return.
-What are Bleach's and Cleanser's return on investment based on book values, respectively?
A)0.22; 0.67
B)0.42; 0.52
C)0.52; 0.42
D)0.67; 0.22

Accepted Answer

The answer of Answer the following questions using the information...

Question 17

When managers set and measure target levels of performance
A)historical-cost-based accounting measures are usually adequate for evaluating economic returns on new investments.
B)historical-cost ROIs cannot be used to evaluate current performance.
C)the timing of feedback is not dependent on the sophistication of the organization's information technology.
D)the timing of feedback depends on the specific level of management receiving the feedback.

Accepted Answer

The timing of feedback depends on the specific level of management receiving the feedback because different levels of management may require different frequencies and types of information to make informed decisions.

Question 18

Provide the missing data for the following situations:

Accepted Answer

The answer of Provide the missing data for the following...

Question 19

Answer the following questions using the information below:
Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009:
  The company is currently using a 12% required rate of return.
-What are Wheels's and Assembly's residual incomes based on book values, respectively?
A)$74,000; $28,500
B)$61,800; $70,000
C)$63,500; $59.500
D)$28,500; $74,000

Accepted Answer

The answer of Answer the following questions using the information...

Question 20

Answer the following questions using the information below:
Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5:
  The company is currently using a 15% required rate of return.
-What are Bleach's and Cleanser's residual incomes based on book values, respectively?
A)$116,250; $32,500
B)$110,000; $67,500
C)$67,500; $110,000
D)$37,500; $116,250

Accepted Answer

Residual income based on book value for Bleach = ($300,000 x 0.15) - $183,750 = $116,250
Residual income based on book value for Cleanser = ($500,000 x 0.15) - $432,500 = $32,500
The best choice is not specified in the question, so there are no choice letter(s) or number(s) to provide.

Quiz 23: Performance Measurement, Compensation, and Multinational Considerations

Hargrave Products has three divisions, which operate autonomously. Their results for 20X5 were as follows: The company's desired rate of return is 15%. Required: a. Compute each division's ROI. Round to three decimal places. b. Compute each division's residual income.

When using the historical cost of assets for calculation of return on investment, is it better to use the gross book value of the assets or the net book value of the assets ? Discuss.

Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base.

The cost today of purchasing an asset identical to the one currently held is called a(n) :

Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

The economic value added concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of performance.

Using net book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet.

A firm will see a difference in the return on investment amount depending if they use historical cost or current cost valuation methods for the assets.

Residual income calculations are similar to EVA® calculations because in each calculation there is a charge for the division's invested capital which is deducted from a measure of that division's profit.

When managers set and measure target levels of performance

Provide the missing data for the following situations: