Question 1

What is the problem with choosing a beginning, ending or average balance when measuring the investment base for performance evaluation?

Accepted Answer

Using the beginning balance could encour

Question 2

The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
$\begin{array}{lcc}
&\text {A}&\text {B}&\text {C}\
\text { Sales } & \$ 320,000 & \$ 540,000&?\
\text { Net operating income } & 60,000 & ?&\$24,000 \
\text { Residual income } & ? & 36,000&14,400 \
\text { Average Division Assets } & ? & ?&80,000 \
\text { Cost of Capital } & 12 \% & 16 \%&? \
\text { Profit Margin } & 20 \% & 5 \%&? \
\text { Asset Turnover } & ? & 4.0 &?\
\text { Return investment } & 15 \% & ?&?
\end{array}$

-
What was A Division's residual income last year?

Accepted Answer

A)  $12,000. 
B)  $22,500. 
C)  $30,000. 
D)  $48,000. 
A)  $12,000. 
B)  $22,500. 
C)  $30,000. 
D)  $48,000.

Question 3

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

Accepted Answer

A)  Research & development costs. 
B)  Advertising expenditures. 
C)  Preferred stock. 
D)  Accounts Payable. 
A)  Research & development costs. 
B)  Advertising expenditures. 
C)  Preferred stock. 
D)  Accounts Payable.

Question 4

The following information is available about the Charger Division of Weston Company. Weston requires a return of 8% from all divisions.
 $\begin{array}{lrr}
\text { Charger Division Earnings from Operations } & \$ & 12,854,000 \
\text { Charger Division Sales } & \$ & 92,500,000 \
\text { Charger Division Identifiable Assets } & \$ & 156,000,000
\end{array}$
 
Required:
a. Compute the ROI for the Charger Division.
b. Compute the residual income for the Charger Division.

Accepted Answer

a. ROI = $12,854,000

Question 5

The following information was presented by Shower Wonder Enterprises for an asset purchased at the beginning of the previous year.
$$\begin{array} { l c } 
\text { Original cost of the asset } & \$ 20,000 \
\text { Useful life of the asset } & 10 \text { years } \
\text { Annual operating profit, including depreciation } & \$ 4,000 \
\text { Salvage value } &\$ - 0 -
\end{array}$$.
What is the return on investment (ROI) assuming Shower Wonder uses (a) the straight-line method for depreciation and (b) average net book values to compute ROI?

Accepted Answer

A)  21.1%. 
B)  20.0%. 
C)  22.2%. 
D)  11.76%. 
A)  21.1%. 
B)  20.0%. 
C)  22.2%. 
D)  11.76%.

Question 6

The following information has been gathered for the Door Division:
$$\begin{array} { l r } 
\text { Return on irvestrnent (ROI) } & 15.0 \% \
\text { Sales } & \$ 120,000 \
\text { Operating assets } & \$ 60,000 \
\text { Cost of Capital } & 12.0 \% \
\text { Profit margin } & 7.5 \%
\end{array}$$
What is the Door Division's residual income?

Accepted Answer

A)  $1,800. 
B)  $2,700. 
C)  $3,600. 
D)  $5,400. 
A)  $1,800. 
B)  $2,700. 
C)  $3,600. 
D)  $5,400.

Question 7

Current costs should not be used to compute either return on investment (ROI) or residual income because current costs are not generally accepted accounting principles (GAAP).

Accepted Answer

A) True 
 B)False

Question 8

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 net book value?
$\begin{array} { l c c c } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$
 A) $\begin{array} { l c c c } & 14.9 \% & 15.9 \% & 16.0 \% \\end{array}$

Accepted Answer

B) $\begin{array} { l c c c } & 15.8 \% & 15.9 \% & 14.9 \% \\end{array}$ 
C) $\begin{array} { l c c c } & 15.6 \% & 15.9 \% & 15.3 \% \\end{array}$ 
D)  $\begin{array} { l c c c } & 15.9 \% & 15 \% & 11.9 \%\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
B) $\begin{array} { l c c c } & 15.8 \% & 15.9 \% & 14.9 \% \\end{array}$ 
C) $\begin{array} { l c c c } & 15.6 \% & 15.9 \% & 15.3 \% \\end{array}$ 
D)  $\begin{array} { l c c c } & 15.9 \% & 15 \% & 11.9 \%\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 9

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 10

Garage 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?

Accepted Answer

A)  $68,000. 
B)  $60,000. 
C)  $48,000. 
D)  $20,000. 
A)  $68,000. 
B)  $60,000. 
C)  $48,000. 
D)  $20,000.

Question 11

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 historical cost and net book value?
$\begin{array} { l r r r } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } \\end{array}$

Accepted Answer

A) $\begin{array} { l r r r } & 21.5 \% & 34.0 \% & 42.0 \% \\end{array}$ 
B) $\begin{array} { l r r r }  & 22.2 \% & 31.3 \% & 43.0 \% \\end{array}$ 
C) $\begin{array} { l r r r } & 23.0 \% & 32.0 \% & 47.0 \% \\end{array}$ 
D)  $\begin{array} { l r r r } & 24.9 \% & 35.0 \% & 49.5 \%\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A) $\begin{array} { l r r r } & 21.5 \% & 34.0 \% & 42.0 \% \\end{array}$ 
B) $\begin{array} { l r r r }  & 22.2 \% & 31.3 \% & 43.0 \% \\end{array}$ 
C) $\begin{array} { l r r r } & 23.0 \% & 32.0 \% & 47.0 \% \\end{array}$ 
D)  $\begin{array} { l r r r } & 24.9 \% & 35.0 \% & 49.5 \%\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 12

The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values.
-
What is the ROI for each year using net book value?
$\begin{array} { l r r r r } 
& \text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\end{array}$

Accepted Answer

A) $\begin{array} { l r r r r }  & 11.1 \% & 12.5 \% && 14.3 \% & 16.7 \% \\end{array}$ 
B) $\begin{array} { l r r r r }  & 10.0 \% & 10.0 \% && 10.0 \% & 10.0 \% \\end{array}$ 
C)  $\begin{array} { l r r r r } & 10.0 \% & 8.9 \% &&& 7.3 \% & 6.5 \% \\end{array}$ 
D)  $\begin{array} { l r r r r } & 11.1 \% & 11.5 \% && 12.9 \% & 12.3 \%
\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A) $\begin{array} { l r r r r }  & 11.1 \% & 12.5 \% && 14.3 \% & 16.7 \% \\end{array}$ 
B) $\begin{array} { l r r r r }  & 10.0 \% & 10.0 \% && 10.0 \% & 10.0 \% \\end{array}$ 
C)  $\begin{array} { l r r r r } & 10.0 \% & 8.9 \% &&& 7.3 \% & 6.5 \% \\end{array}$ 
D)  $\begin{array} { l r r r r } & 11.1 \% & 11.5 \% && 12.9 \% & 12.3 \%
\end{array}$ 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 13

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

Accepted Answer

A)  Historical weighted average cost of capital. 
B)  Marginal after-tax cost of new equity capital. 
C)  Cost of debt and equity used to finance a project. 
D)  Return on investment (ROI). 
A)  Historical weighted average cost of capital. 
B)  Marginal after-tax cost of new equity capital. 
C)  Cost of debt and equity used to finance a project. 
D)  Return on investment (ROI).

Question 14

In determining the dollar amount to use for operating assets in the return on investment (ROI) calculation, companies will generally use either net book value or gross cost of the assets. Which of the following is not an argument for the use of net book value rather than gross cost?

Accepted Answer

A)  It is consistent with how assets are reported on the balance sheet. 
B)  It eliminates the depreciation method as a factor in ROI calculations. 
C)  It encourages the replacement of old, worn-out equipment. 
D)  It will result in a decrease of ROI each year. 
A)  It is consistent with how assets are reported on the balance sheet. 
B)  It eliminates the depreciation method as a factor in ROI calculations. 
C)  It encourages the replacement of old, worn-out equipment. 
D)  It will result in a decrease of ROI each year.

Question 15

Xi, Inc. is just starting up. The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees. Mr. Yang, the CEO, is unsure about the best way to evaluate his division managers. He has heard the terms return on investment, residual income, economic value added, and flexible budgets but wants to know the pros and cons of each.
Required:
Briefly describe ROI, residual income, EVA and other approaches to performance evaluation. Include in your discussion, where appropriate, how to calculate the measure and problem areas in the development of some of the results.

Accepted Answer

Formulas: ROI = divisional after-tax inc

Question 16

One problem with economic value added (EVA) adjustments is determining the appropriate life for expenditures that benefit multiple periods.

Accepted Answer

A) True 
 B)False

Question 17

The Dry Wall Division reports the following operating data for the past two years:
$\begin{array}{lrr}
&\text { Year } 1& \text { Year } 2\
\text { Margin } & 16 \% & ? \
\text { Turnover } & 2.5 & 2.0 \
\text { Average operating assets } & ? & \$ 150,000 \
\text { Net operating income } & \$ 40,000 & ? \
\text { Stockholders' equity } & \$ 80,000 & \$ 125,000\
\text { Sales }&?&?
\end{array}$

-
The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.
The margin in Year 2 was:

Accepted Answer

A)  48%. 
B)  32%. 
C)  20%. 
D)  10%. 
A)  48%. 
B)  32%. 
C)  20%. 
D)  10%.

Question 18

The following information is available about the Appliance Division of Rainier Company.
Rainier requires a return of 9% from all divisions.
 $$\begin{array} { l c } 
\text { Appliance Division Earnings from Operations } & \$ 18,462,000 \
\text { Appliance Division Sales } & \$ 112,600,000 \
\text { Appliance Division Identifiable Assets } & \$ 173,700,000
\end{array}$$ 
Required:
a. Compute the ROI for the Appliance Division.
b. Compute the residual income for the Appliance Division.

Accepted Answer

a. ROI = $18,462,000

Question 19

Madrigal Corporation purchased a new machine for $120,000. The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI) of 15%. ROI is computed using annual cash flows and straight-line depreciation. What is the annual cash flow using the gross book value method?

Accepted Answer

A)  $12,200. 
B)  $18,000. 
C)  $28,200. 
D)  $30,000. 
A)  $12,200. 
B)  $18,000. 
C)  $28,200. 
D)  $30,000.

Question 20

The Labrador Falls Company has three divisions: A Division, B Division, and C Division.
$\begin{array}{lcc}
&\text {A}&\text {B}&\text {C}\
\text { Sales } & \$ 320,000 & \$ 540,000&?\
\text { Net operating income } & 60,000 & ?&\$24,000 \
\text { Residual income } & ? & 36,000&14,400 \
\text { Average Division Assets } & ? & ?&80,000 \
\text { Cost of Capital } & 12 \% & 16 \%&? \
\text { Profit Margin } & 20 \% & 5 \%&? \
\text { Asset Turnover } & ? & 4.0 &?\
\text { Return investment } & 15 \% & ?&?
\end{array}$

-
What was B Division's return on investment (ROI) last year?

Accepted Answer

A)  16.00%. 
B)  20.00%. 
C)  24.00%. 
D)  33.75%. 
A)  16.00%. 
B)  20.00%. 
C)  24.00%. 
D)  33.75%.

What is the problem with choosing a beginning, ending or average balance when measuring the investment base for performance evaluation?

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

The following information has been gathered for the Door Division: Return on irvestrnent (ROI) 15.0\% Sales \ 120,000 Operating assets \ 60,000 Cost of Capital 12.0\% Profit margin 7.5\% What is the Door Division's residual income?

Current costs should not be used to compute either return on investment (ROI) or residual income because current costs are not generally accepted accounting principles (GAAP).

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.

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

In determining the dollar amount to use for operating assets in the return on investment (ROI) calculation, companies will generally use either net book value or gross cost of the assets. Which of the following is not an argument for the use of net book value rather than gross cost?

One problem with economic value added (EVA) adjustments is determining the appropriate life for expenditures that benefit multiple periods.

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

What is the problem with choosing a beginning, ending or average balance when measuring the investment base for performance evaluation?

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

The following information has been gathered for the Door Division: Return on irvestrnent (ROI) 15.0\% Sales \ 120,000 Operating assets \ 60,000 Cost of Capital 12.0\% Profit margin 7.5\% What is the Door Division's residual income?

Current costs should not be used to compute either return on investment (ROI) or residual income because current costs are not generally accepted accounting principles (GAAP).

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.

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

In determining the dollar amount to use for operating assets in the return on investment (ROI) calculation, companies will generally use either net book value or gross cost of the assets. Which of the following is not an argument for the use of net book value rather than gross cost?

One problem with economic value added (EVA) adjustments is determining the appropriate life for expenditures that benefit multiple periods.

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