Question 1

The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100
Variable manufacturing costs per unit $25
Variable administrative costs per unit $5
Total fixed manufacturing overhead $20,000
Total fixed administrative costs $5,000
Return on Investment is:
A)The same as residual income
B)Net operating income divided by average operating assets
C)A nonfinancial measure of performance
D)Net operating income minus average operating assets X cost of capital

Accepted Answer

Return on Investment (ROI) is calculated as net operating income divided by average operating assets.

Question 2

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The average investment to be used in the EVA computation for 2005 was:
A)$257,000
B)$227,000
C)$279,000
D)$175,000

Accepted Answer

The answer of Bellingham Division has a required rate of...

Question 3

The manager in a profit centre is responsible for:
A)Investments
B)Only revenues
C)Only the costs of production or services
D)Both costs and revenues

Accepted Answer

The manager in a profit centre is responsible for both costs and revenues, as they are accountable for ensuring that the centre operates efficiently enough to generate profits. This includes managing expenses (costs) and maximizing revenues.

Question 4

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The after-tax income for 2005 was:
A)$47,500
B)$11,400
C)$7,600
D)$31,667

Accepted Answer

The answer of Bellingham Division has a required rate of...

Question 5

In responsibility accounting, information is used to:
I. Measure performance
II. Produce financial statements for external users
III. Motivate managers to perform well
A)I only
B)I and II only
C)II and III only
D)I and III only

Accepted Answer

Responsibility accounting is a management control system that assigns responsibility to each segment of an organization to evaluate performance in terms of profitability. This system is used for internal reporting and decision-making purposes rather than external reporting. Therefore, options II is not applicable for responsibility accounting. The primary objectives of responsibility accounting are to measure performance and motivate managers to perform well. Therefore, options I and III are correct. Hence, the correct answer is D.

Question 6

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The residual income for 2005 was:
A)($21,000)
B)($22,000)
C)($14,000)
D)$1,000

Accepted Answer

The answer of Bellingham Division has a required rate of...

Question 7

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax)income was:
A)$30,500
B)$192,500
C)$35,000
D)$16,250

Accepted Answer

Residual Income = Operating Income - (Required Rate of Return * Total Investment)
Residual Income = $5,000
Required Rate of Return = 15%
Total Investment = Sales / Investment Turnover
Total Investment = $500,000 / 2.5
Total Investment = $200,000

$5,000 = Operating Income - (0.15 * $200,000)
$5,000 = Operating Income - $30,000
Operating Income = $35,000

Therefore, the operating income was $35,000.

Question 8

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was:
A)$1,250,000
B)$75,000
C)$170,000
D)$200,000

Accepted Answer

The answer of Teresa's Taco Co. had the following results...

Question 9

Specific knowledge is:
A)Not necessary in today's business operations
B)Not very costly to transfer
C)The same as general knowledge
D)Detailed technical knowledge about specific processes

Accepted Answer

Specific knowledge refers to detailed technical knowledge about specific processes or domains. It is important in many business operations and can be costly to transfer, as it often requires extensive training and expertise. It is not the same as general knowledge, which refers to broad and basic knowledge about various topics.

Question 10

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The EVA for 2005 was:
A)($18,600)
B)($12,840)
C)($9,600)
D)($6,600)

Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT - (Capital * Cost of Capital). For 2005, NOPAT = Operating Income * (1 - Tax Rate) = $19,000 * (1 - 0.40) = $11,400. Capital = Current Assets + Long-term Assets - Current Liabilities = $50,000 + $200,000 - $40,000 = $210,000. Cost of Capital = 20%. EVA = $11,400 - ($210,000 * 0.20) = $11,400 - $42,000 = -$30,600. However, the correct calculation should use the weighted average cost of capital (12%) instead of the required rate of return (20%), leading to EVA = $11,400 - ($210,000 * 0.12) = $11,400 - $25,200 = -$13,800. The closest option is C) ($9,600), indicating a possible error in the provided options or calculations.

Question 11

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on investment was:
A)15.4%
B)21.67%
C)15.25%
D)17.5%

Accepted Answer

The answer of Teresa's Taco Co. had the following results...

Question 12

Thurston, Inc. experienced a 14% rate of return on average investment of $1,000,000. If the required rate of return is 12%, then residual income is:
A)$20,000
B)$40,000
C)$120,000
D)$140,000

Accepted Answer

Residual income is calculated as the actual return minus the required return. Here, the actual return is 14% of $1,000,000, which is $140,000. The required return is 12% of $1,000,000, which is $120,000. Therefore, the residual income is $140,000 - $120,000 = $20,000.

Question 13

For 2005, Aberdeen's return on sales was 10% and its investment turnover was 2.0. Return on investment for 2005 was:
A)5%
B)10%
C)12%
D)20%

Accepted Answer

Return on investment can be calculated by multiplying return on sales (ROS) and investment turnover (ITO).
Return on investment (ROI) = ROS x ITO
= 10% x 2.0
= 20%
Therefore, the correct answer is C)12%, which is the closest option to the calculated ROI of 20%.

Question 14

A business segment that has responsibility for both revenues and expenses is called a(n)
A)Administrative centre
B)Investment centre
C)Profit centre
D)Revenue centre

Accepted Answer

The answer of A business segment that has responsibility for...

Question 15

The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100
Variable manufacturing costs per unit $25
Variable administrative costs per unit $5
Total fixed manufacturing overhead $20,000
Total fixed administrative costs $5,000
Residual income is:
A)The same as return on investment
B)A nonfinancial measure of performance
C)Net operating income minus a required rate of return X average operating assets
D)Sales divided by net operating income

Accepted Answer

Residual income is calculated as net operating income minus a required rate of return multiplied by the average operating assets. It is a financial measure of performance that indicates how much income is generated above a minimum required rate of return on invested assets. Therefore, option C is the correct answer. Options A, B, and D are incorrect as they do not define residual income accurately.

Question 16

The location of decision authority in an organization depends on:
A)The size of the organization
B)Whether specific or general knowledge is most important in successful decision-making
C)Whether the organization is for-profit or not-for-profit
D)Whether the organization uses a lot of technology

Accepted Answer

The location of decision authority is influenced by whether specific or general knowledge is most important, as it determines who is best equipped to make decisions effectively.

Question 17

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on sales was:
A)7%
B)6)1%
C)38.5%
D)3)25%

Accepted Answer

Return on sales can be calculated as Residual income/Sales. 
Residual income = Operating income - (Assets x Required rate of return)
Given Residual income = $5,000 and Required rate of return = 15%
Assets = Residual income/Required rate of return = $5,000/0.15 = $33,333.33
Investment turnover = Sales/Assets = 2.5
Therefore, Sales = Investment turnover x Assets = $83,333.33
Return on sales = Residual income/Sales = $5,000/$500,000 = 0.01 = 1%
Hence, the correct answer is 7% which is not among the given choices. However, if we assume that the residual income is given as a percentage of assets, then the answer would be 1.5%.

Question 18

Suppose an office building is owned for which long-term leases have been signed, the tenants pay utilities and operating costs, and straight-line amortization is taken. The rate of return on the book value of this investment can be expected to:
A)Increase over time
B)Remain constant over time
C)Decrease over timed
D)Vary randomly over time

Accepted Answer

The answer of Suppose an office building is owned for...

Question 19

For 2006, Aberdeen's return on investment was 26% and its investment turnover was 2.0. Return on sales for 2006 was:
A)10%
B)13%
C)24%
D)26%

Accepted Answer

The answer of For 2006, Aberdeen's return on investment was...

Question 20

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004
Current assets $ 50,000 $ 60,000
Long-term assets 200,000 204,000
Accumulated amortization 60,000 44,000
Current liabilities 40,000 20,000
Long-term debt 100,000 140,000
Operating income for the year 19,000 21,000
Tax rate 40% 40%
The ROI for 2005 was:
A)9)3%
B)10.0%
C)3)7%
D)20.0%

Accepted Answer

The ROI for 2005 is calculated as follows:ROI = (Operating income - Taxes) / (Total assets - Current liabilities)= (19,000 - 0.4 * 19,000) / (200,000 + 50,000 - 40,000)= 11,400 / 210,000= 0.0933 or 9.33%

Quiz 16: Performance Evaluation and Compensation

The manager in a profit centre is responsible for:

In responsibility accounting, information is used to: I. Measure performance II. Produce financial statements for external users III. Motivate managers to perform well

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax) income was:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was:

Specific knowledge is:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on investment was:

Thurston, Inc. experienced a 14% rate of return on average investment of $1,000,000. If the required rate of return is 12%, then residual income is:

For 2005, Aberdeen's return on sales was 10% and its investment turnover was 2.0. Return on investment for 2005 was:

A business segment that has responsibility for both revenues and expenses is called a(n)

The Machining Division has a capacity of 2,000 units. Its sales and cost data are: Selling price per unit $100 Variable manufacturing costs per unit $25 Variable administrative costs per unit $5 Total fixed manufacturing overhead $20,000 Total fixed administrative costs $5,000 Residual income is:

The location of decision authority in an organization depends on:

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on sales was:

Suppose an office building is owned for which long-term leases have been signed, the tenants pay utilities and operating costs, and straight-line amortization is taken. The rate of return on the book value of this investment can be expected to:

For 2006, Aberdeen's return on investment was 26% and its investment turnover was 2.0. Return on sales for 2006 was: