Question 1

The Hobby Shop Company owns outlets in Olympia,WA,Boise,ID,and Boston,MA.The operating income for the Olympia outlet is $260,000 while the operating incomes for the Boise and Boston outlets are $320,000 and $620,000.The 2012 gross book value of the total assets for the Olympia outlet is $2,300,000 and for the Boise outlet and Boston outlet the gross book value of the total assets is $2,800,000 and $4,100,000.
Required
Compute the 2012 ROIs for the Olympia outlet,the Boise outlet,and the Boston outlet for the Hobby Shop Company.

Accepted Answer

B)[($260,000/$2,300,000)] = 0.113 or 11.3%
[($320,000/$2,800,000)] = 0.114 or 11.4%
[($620,000/$4,100,000)] = 0.151 or 15.1%

Question 2

What causes the initial method of calculating EVA to be less important than evaluating performance on the basis of improvements in EVA?

Accepted Answer

The answer of What causes the initial method of calculating...

Question 3

Surveys report ________ book value to be the dominant measure of assets used by companies for internal performance evaluation.

Accepted Answer

Net book value is the value of an asset after depreciation has been taken into account. It is the most commonly used measure of assets for internal performance evaluation because it provides a more accurate picture of the asset's current value than other measures, such as cost or historical value.

Question 4

Another way to motivate managers to take a long-run perspective is by compensating them on the basis of changes in the market price of the company's stock.

Accepted Answer

By compensating managers based on changes in the market price of the company's stock, they are incentivized to focus on long-term success and growth rather than short-term gains. This aligns their interests with those of the shareholders and encourages decision-making that maximizes the company's value in the long run.

Question 5

Companies that use ROI or RI generally define investment as the total assets available.

Accepted Answer

Companies that use ROI or RI generally define investment as the total assets available, which includes both debt and equity.

Question 6

Evaluating performance on the basis of improvements in EVA makes the initial method of calculating EVA more important.

Accepted Answer

Evaluating performance on the basis of improvements in EVA makes the initial method of calculating EVA less important.

Question 7

What are the advantages of the net book value?

Accepted Answer

The answer of What are the advantages of the net...

Question 8

In companies that use EVA as a performance measure,top management can evaluate operations on year-to-year changes in EVA,rather than on ________ measures of EVA.

Accepted Answer

Absolute measures of EVA are not affected by external factors such as changes in interest rates or inflation, and therefore provide a more accurate representation of a company's actual performance compared to past, preset, forecasted, or benchmark measures.

Question 9

The Hobby Shop Company has outlets in Olympia,WA,Boise,ID,and Boston,MA.The gross book value of long-term assets at historical costs that the Olympia outlet holds is $1,600,000,the Boise outlets holds $2,400,000 and the Boston outlet holds $3,200,000.The construction cost index for all three outlets in 2012 was 190.The construction cost index the year that the Olympia outlet was built was 120,the year that the Boise outlet was built it was 160 and the year that the Boston outlet was built it was 170.
Required
Compute the gross book assets at current cost at the end of 2012 for the Olympia outlet,the Boise outlet,and the Boston outlet.

Accepted Answer

C)[($1,600,000 × (190/120)] = $2,533,333
[($2,400,000 × (190/160)] = $2,850,000
[($3,200,000 × (190/170)] = $3,576,471

Question 10

Companies that adopt EVA^© define investment as total assets employed plus current liabilities.

Accepted Answer

Companies that adopt EVA^© define investment as total assets employed minus current liabilities.

Question 11

Why may current-cost estimates be difficult to obtain for some assets?

Accepted Answer

The answer of Why may current-cost estimates be difficult to...

Question 12

Managers can use historical-cost ROIs to evaluate current performance by establishing ________ ROIs.

Accepted Answer

Managers can use historical-cost ROIs to evaluate current performance by establishing target ROIs, which are benchmarks or goals set based on past performance. This allows them to compare current performance with the desired level of performance and identify areas for improvement. The other options (function, ambition, intention, destination) do not accurately reflect the concept of using historical-cost ROIs to evaluate current performance.

Question 13

How do managers determine if assets are measured at historic costs,or current costs?

Accepted Answer

The answer of How do managers determine if assets are...

Question 14

In establishing targets for financial performance measures,companies using the balanced scorecard simultaneously determine targets in the customer,________,and learning-and-growth perspectives.

Accepted Answer

The balanced scorecard is a strategic management tool that helps companies align business activities to their vision and strategy. It includes financial, customer, internal-business-process, and learning-and-growth perspectives. Therefore, in establishing targets for financial performance measures, companies using the balanced scorecard would simultaneously determine targets in the customer, internal-business-process, and learning-and-growth perspectives. Choices A, B, C, and E are unrelated to the balanced scorecard or target setting for financial performance measures.

Question 15

Companies should tailor budgets and the timing of feedback to managers and employees to the nature of the ________,the accounting system in place,and the particular performance measure being used for evaluation.

Accepted Answer

Tailoring budgets and feedback timing to managers and employees requires considering the characteristics of the subunit or department being evaluated. The accounting system in place and the particular performance measure being used are also important factors that should be taken into account. Business plan, market adaption, and internal benchmark are not directly related to the issue of tailoring budgets and feedback timing to managers and employees.

Question 16

Why should managers evaluate subunits over multiple years?

Accepted Answer

The answer of Why should managers evaluate subunits over multiple...

Question 17

Explain how the multiyear analysis is an advantage to managers that use the RI measure.

Accepted Answer

The answer of Explain how the multiyear analysis is an...

Question 18

The following data was compiled for Infer-Tech PC Company in order to assess the effect of a $500,000 initial investment with a $70,000 operating cost increase per year over a five year period.The company factored in a 15% required rate of return.

Required
Compute the present value of the investment in year 2 and year 4.

Accepted Answer

D)[$170,000 × ($1.00/$1.15²)] = $128,544 [($170,000 × ($1.00/$1.15⁴)] = $97,198

Question 19

The following information was compiled for Infer-Tech PC Company applying a $500,000 initial investment with an $80,000 operating cost increase per year over a five year period.The company factored in a 15% required rate of return.

Required
Compute the present value of the investment in years 2 and 4.Next,compute the net present value for the investment for the full five years.

Accepted Answer

B)[($20,000 × ($1.00/$1.15²)] ~ $15,123 [($50,000 × ($1.00/1.15⁴)] ~$28,588 [($4,348 + $15,123 + $23,013 + $28,588 + $32,316)] = $103,388

Question 20

A popular way for management to establish targets is to set intermittent improvement targets.

Accepted Answer

A popular way for managers to establish targets is to set continuous improvement targets.

Quiz 16: Performance Measurement and Compensation