Question 1

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 disadvantage of residual income is that it may encourage managers to undertake projects with high residual income even if those projects do not fit with the company's overall goals or strategies. It does not necessarily promote spending only the minimum acceptable rate of return.

Question 2

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

The profit margin is calculated as (Income from Operations / Sales) * 100. Therefore, the profit margin is ($5,000 / $30,000) * 100 = 16.67%.

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

Using the rate of return on investment as a divisional performance measure might not always motivate managers to invest in proposals that increase the overall rate of return for the company, especially if those proposals offer a lower return rate than the division's current rate, even if they are above the company's average. This can lead to underinvestment or rejection of profitable projects that would benefit the company as a whole.

Question 4

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 as sales divided by invested assets, which in this case is $30,000 / $25,000 = 1.2.

Question 5

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 rate of return on investment and the actual income earned, making it a more comprehensive performance measure.

Question 6

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

The residual income is calculated as the divisional income from operations minus the product of the minimum rate of return and the invested assets. Here, it would be $100,000 - ($850,000 * 8%) = $100,000 - $68,000 = $32,000.

Question 7

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 division's investment and allows for better comparability between divisions, making it a more comprehensive performance measure than income from operations.

Question 8

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 residual income is calculated as the divisional income from operations minus the product of the minimum rate of return and the invested assets. Here, it would be $75,000 - ($737,500 * 6%) = $75,000 - $44,250 = $30,750.

Question 9

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 10

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 11

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 as top management can set a minimum rate of return as a benchmark to measure the performance of a division and determine the acceptability of its income from operations. This can also encourage managers to focus on maximizing the return on invested assets to meet or exceed the established minimum rate.

Question 12

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. So, Investment turnover = $30,000 / $25,000 = 1.2. Therefore, the statement is true.

Question 13

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. Therefore, the investment turnover is $263,750 / $187,500 = 1.41.

Question 14

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 15

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

Accepted Answer

This is the correct definition of residual income.

Question 16

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 = Income from operations / Sales
Profit margin = 6,000 / 30,000
Profit margin = 0.2 or 20%

Question 17

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

Accepted Answer

The statement is correct. The profit margin component of the rate of return on investment is the ratio of income from operations to sales. It indicates how much profit a company makes for every dollar of sales.

Question 18

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

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

Question 19

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 = Sales / Invested Assets
Investment turnover = $975,000 / $750,000
Investment turnover = 1.3
Therefore, the statement is true.

Question 20

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 statement is correct as investment turnover is a measure of efficiency in asset utilization and shows how many dollars of sales are generated for each dollar of invested assets.

Quiz 23: Evaluating Decentralized Operations