Question 1

Describe the two main limitations of return on investment.

Accepted Answer

First, the accounting income and the ass

Question 2

Sales and average operating assets for Wyeth Company and Genesis Company are given below:
$\begin{array}{lllr}
&&\text { Average }\
&&\text { Operating }\
&\text { Sales }&\text { Assets}\
\text { Wyeth Company } & \$ 20,000 & \$ 8,000 \
\text { Genesis Company } & \$ 50,000& \$ 10,000
\end{array}$

What is the margin that each company will have to earn in order to generate a return on investment of 20%?

Accepted Answer

A)  12% and 16%. 
B)  50% and 100%. 
C)  8% and 4%. 
D)  2.5% and 5%. 
A)  12% and 16%. 
B)  50% and 100%. 
C)  8% and 4%. 
D)  2.5% and 5%.

Question 3

It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI.

Accepted Answer

A) True 
 B)False

Question 4

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Accepted Answer

A) True 
 B)False

Question 5

Return on investment (ROI) can be decomposed into the asset turnover and the:

Accepted Answer

A)  gross margin ratio. 
B)  profit margin ratio. 
C)  operating margin ratio. 
D)  contribution margin ratio. 
A)  gross margin ratio. 
B)  profit margin ratio. 
C)  operating margin ratio. 
D)  contribution margin ratio.

Question 6

How will decreases in the following items affect residual income?
 $\begin{array} {  l  c c  } & \text { Decrease in Expenses } & \text { Decrease in Inventnry } \\end{array}$

Accepted Answer

A)  $\begin{array} {  l  c c  } & \text { Decrease RI } &&&&&& \text { Decrease RI } \\end{array}$ 
B)  $\begin{array} {  l  c c  } & \text { Decrease RI } &&&&&& \text { Increase RI } \\end{array}$ 
C)  $\begin{array} {  l  c c  } & \text { Increase RI } &&&&&& \text { Decrease RI } \\end{array}$ 
D)  $\begin{array} {  l  c c  } & \text { Increase RI } &&&&&& \text { Increase RI } \\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  $\begin{array} {  l  c c  } & \text { Decrease RI } &&&&&& \text { Decrease RI } \\end{array}$ 
B)  $\begin{array} {  l  c c  } & \text { Decrease RI } &&&&&& \text { Increase RI } \\end{array}$ 
C)  $\begin{array} {  l  c c  } & \text { Increase RI } &&&&&& \text { Decrease RI } \\end{array}$ 
D)  $\begin{array} {  l  c c  } & \text { Increase RI } &&&&&& \text { Increase RI } \\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 7

Imagination Corporation uses residual income to evaluate the performance of its divisions. Imagination's minimum required rate of return is 11%. In April, the Commercial Products Division had average operating assets of $100,000 and net operating income of $9,400. What was the Commercial Products Division's residual income in April?

Accepted Answer

A)  $(1,600). 
B)  $1,600. 
C)  $1,034. 
D)  $(1,034). 
A)  $(1,600). 
B)  $1,600. 
C)  $1,034. 
D)  $(1,034).

Question 8

Average operating assets are $110,000 and net operating income is $23,100. The company invests $25,000 in new assets for a project that will increase net operating income by $4,750. What is the return on investment (ROI) of the new project?

Accepted Answer

A)  21%. 
B)  19%. 
C)  18.5%. 
D)  20%. 
A)  21%. 
B)  19%. 
C)  18.5%. 
D)  20%.

Question 9

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

Accepted Answer

Gross margin ratio is defined as the gro

Question 10

Explain how using gross book value to measure the assets gives different results than using net book value. What happens to ROI over time under each of the two measures?

Accepted Answer

Gross book value results in a constant d

Question 11

The ArtMart Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows:
 $\begin{array}{lr} 
& \text { Division X }& \text { Division  Y }& \text { Division Z}\
\text { Residual income } & \$ 8,400 &\$27,200&\$2,000\
\text { Net operating income } & 188,600&115,600&52,000 \
\text { Average operating } & \
\text { assets } & 820,000 &680,000&400,000\
\text { Sales } & 1,640,000 &1,445,000&1,040,000\
\text { Profit margin } & 11.5 \%&8.0\%&5.0\%
\end{array}$ 
Corporate headquarters is offering an investment opportunity to each of the divisions. The opportunity will yield an operating income of $35,000, based on an average operating investment of $246,000.
Required:
a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.
b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.

Accepted Answer

a. ROI for new investment = $35,000/$246

Question 12

Seaside Enterprises has the following data for its three divisions for the year:
 $\begin{array}{lrrr}
&\text { SB }& \text { TH } &\text { GM }\
\text { Revenues } & \$ 1,200,000 & \$ 3,800,000& \$ 2,800,000 \
\text { Cost of sales } & 769,500 & 1,900,000& 1,400,00 \
\text { Allocated corporate overhead } & 72,000 & 228,000 & 210,000 \
\text { Other general \& administration } & 158,500& 1,100,000& 1,100,00
\end{array}$
 
Required:
a. Compute divisional operating income for each of the divisions. Assume taxes are 30%.
b. Calculate the gross margin ratio for each division.
c. Calculate the operating margin ratio for each division.
d. Calculate the profit margin ratio for each division.

Accepted Answer

a.   b. SB: $430,500/$1,200,000 = 35.88%

Question 13

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000. The cash flows from these assets for the past three years have been:
$$\begin{array} { c l l } 
\text { Year } &  { \text { Cash flows } } \
1 & \mathbf { \$ } 1,200,000 \
2 & \$ 1,400,000 \
3 & \$ 1,620,000
\end{array}$$
The current (i.e., replacement) costs of these assets were expected to increase 25% each year. 
-Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.
What is the ROI using current costs and gross book value?
$\begin{array} { l c c c } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$

Accepted Answer

A) $\begin{array} { l c c c } & 14.0 \% & 18.0 \% & 22.4 \% \\end{array}$ 
B)  $\begin{array} { l c c c } & 13.0 \% & 14.0 \% & 14.0 \% \\end{array}$ 
C) $\begin{array} { l c c c } & 12.0 \% & 10.1 \% & 9.5 \% \\end{array}$ 
D) $\begin{array} { l c c c } & 14.0 \% & 12.4 \% & 10.7 \%
\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A) $\begin{array} { l c c c } & 14.0 \% & 18.0 \% & 22.4 \% \\end{array}$ 
B)  $\begin{array} { l c c c } & 13.0 \% & 14.0 \% & 14.0 \% \\end{array}$ 
C) $\begin{array} { l c c c } & 12.0 \% & 10.1 \% & 9.5 \% \\end{array}$ 
D) $\begin{array} { l c c c } & 14.0 \% & 12.4 \% & 10.7 \%
\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 14

Danali Fabrication is a division of a major corporation. Last year the division had total sales of $21,120,000, net operating income of $2,006,400, and average operating assets of $6,000,000. The company's minimum required rate of return is 12%.
Required:
What is the division's return on investment (ROI)?

Accepted Answer

ROI = Net operating

Question 15

How will increases in the following items affect return on investment (ROI)?
$\begin{array} { l c  c  } 
 & \text { Increase in Expenses } & \text { Increase in Inventury } \\end{array}$

Accepted Answer

A)  $\begin{array} { l c  c  } & \text { Decrease ROI } &&&& \text { Decrease ROI } \\end{array}$ 
B) $\begin{array} { l c  c  }   & \text { Decrease ROI } &&&& \text { Increase ROI } \\end{array}$ 
C) $\begin{array} { l c  c  }  & \text { Increase ROI } &&&& \text { Decrease ROI } \\end{array}$ 
D) $\begin{array} { l c  c  } & \text { Increase ROI } &&&& \text { Increase ROI } \\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  $\begin{array} { l c  c  } & \text { Decrease ROI } &&&& \text { Decrease ROI } \\end{array}$ 
B) $\begin{array} { l c  c  }   & \text { Decrease ROI } &&&& \text { Increase ROI } \\end{array}$ 
C) $\begin{array} { l c  c  }  & \text { Increase ROI } &&&& \text { Decrease ROI } \\end{array}$ 
D) $\begin{array} { l c  c  } & \text { Increase ROI } &&&& \text { Increase ROI } \\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 16

In general, a division's investment base includes an allocated share of the corporate headquarters' assets.

Accepted Answer

A) True 
 B)False

Question 17

The following information is available about the status and operations for Division B of Tallon Company, which has a minimum required ROI of 20%. Answer each item independently of the others.
 $$\begin{array} { l r } 
& \text { Division  B} \
\text { Divisional investment } & \$ 1,500,000 \
\text { Divisional profit } & \$ 550,000 \
\text { Divisional sales } & \$ 3,600,000
\end{array}$$ 
Required:
a. Compute the residual income for Division B.
b. Division B could increase its profit by $25,000 by increasing its investment by $100,000. Compute its new residual income.
c. Division B could increase its profit margin ratio by one percentage point (for example: from 13% to 14%), without increasing total sales or investment. Compute its new residual income. (Round immediate calculations to three decimal places.)
d. Division B could reduce its investment so that its asset turnover increased by one time, while holding total sales and profit constant. Compute its new residual income.

Accepted Answer

a. $550,000 - (20% × $1,500,000) = $250,

Question 18

The Calculating Fashion Company has two operating divisions: North and South. The following information was collected from its financial statements.
 $$\begin{array} { l r r } 
& \text { North } & { \text { South } } \
\text { Operating income } & \$ 15,375 & \$ 9,160 \
\text { Sales } & 90,100 & 128,445 \
\text { Average operating assets } & 47,620 & 37,690
\end{array}$$ 
Required:
The South Division has a goal to increase its ROI to 30% by the end of next year. Compute the increase (decrease) required in each of the following items in order to achieve this goal.
a. Operating assets
b. Total costs
c. Sales

Accepted Answer

a. ROI: 30% = $9,160/assets; assets = $3

Question 19

Raisin Corporation uses residual income to evaluate the performance of its divisions. The minimum required rate of return for performance evaluation purposes is 19%. The Processed Foods Division had average operating assets of $410,000 and net operating income of $86,000 in June.
Required:
What was the Processed Foods Division's residual income in June?

Accepted Answer

Net operating income $ 86,000

Question 20

Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that:

Accepted Answer

A)  residual income can be computed without regard to identifying an investment base. 
B)  appropriate goal congruence behavior is more likely to occur when using residual income. 
C)  residual income is well accepted in many organizations and often used in the financial press. 
D)  ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage. 
A)  residual income can be computed without regard to identifying an investment base. 
B)  appropriate goal congruence behavior is more likely to occur when using residual income. 
C)  residual income is well accepted in many organizations and often used in the financial press. 
D)  ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.

Describe the two main limitations of return on investment.

Sales and average operating assets for Wyeth Company and Genesis Company are given below: Average Operating Sales Assets Wyeth Company \ 20,000 \ 8,000 Genesis Company \ 50,000 \ 10,000 What is the margin that each company will have to earn in order to generate a return on investment of 20%?

It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI.

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Return on investment (ROI) can be decomposed into the asset turnover and the:

How will decreases in the following items affect residual income? Decrease in Expenses Decrease in Inventnry A) Decrease RI Decrease RI B) Decrease RI Increase RI C) Increase RI Decrease RI D) Increase RI Increase RI

Average operating assets are $110,000 and net operating income is $23,100. The company invests $25,000 in new assets for a project that will increase net operating income by $4,750. What is the return on investment (ROI) of the new project?

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

Explain how using gross book value to measure the assets gives different results than using net book value. What happens to ROI over time under each of the two measures?

How will increases in the following items affect return on investment (ROI)? Increase in Expenses Increase in Inventury A) Decrease ROI Decrease ROI B) Decrease ROI Increase ROI C) Increase ROI Decrease ROI D) Increase ROI Increase ROI

In general, a division's investment base includes an allocated share of the corporate headquarters' assets.

Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that:

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

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Exam 14: Business Unit Performance Measurement

Describe the two main limitations of return on investment.

Sales and average operating assets for Wyeth Company and Genesis Company are given below: Average Operating Sales Assets Wyeth Company \ 20,000 \ 8,000 Genesis Company \ 50,000 \ 10,000 What is the margin that each company will have to earn in order to generate a return on investment of 20%?

It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI.

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Return on investment (ROI) can be decomposed into the asset turnover and the:

How will decreases in the following items affect residual income? Decrease in Expenses Decrease in Inventnry A) Decrease RI Decrease RI B) Decrease RI Increase RI C) Increase RI Decrease RI D) Increase RI Increase RI

Average operating assets are $110,000 and net operating income is $23,100. The company invests $25,000 in new assets for a project that will increase net operating income by $4,750. What is the return on investment (ROI) of the new project?

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

Explain how using gross book value to measure the assets gives different results than using net book value. What happens to ROI over time under each of the two measures?

How will increases in the following items affect return on investment (ROI)? Increase in Expenses Increase in Inventury A) Decrease ROI Decrease ROI B) Decrease ROI Increase ROI C) Increase ROI Decrease ROI D) Increase ROI Increase ROI

In general, a division's investment base includes an allocated share of the corporate headquarters' assets.

Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that:

Cost Accounting: Information for Decision Making

Cost Concepts and Behavior

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters