Exam 14: Business Unit Performance Measurement

Welsh Corporation's return on investment (ROI)on some new equipment was 20% using beginning-of-year net book value.The gross book value of the equipment is $250,000.Accumulated depreciation at the beginning of the year was $10,000.This represents one-half year's straight-line depreciation.What is the annual before-tax cash flow from the new equipment?

Explain the difference between the gross margin ratio,the operating margin ratio,and the profit margin ratio.

Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance.

Using net book values instead of gross book values to compute return on investment (ROI)might encourage an investment center manager to delay replacing inefficient assets until they are fully depreciated.

The use of residual income reduces,but does not eliminate,the suboptimization problem.

Which of the following items would not be an example of an economic value added (EVA)adjustment to eliminate accounting distortions?

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because (CMA adapted)

One advantage of using after-tax income as a performance measure of divisional results is it's a financial accounting measure that is also used to compute the organizational income.

Which of the following should not be used for the cost of capital to compute residual income?