Exam 14: Business Unit Performance Measurement

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. If sales each year average $840,000, what will be the asset turnover using gross book value?

A manager can increase his/her return on investment (ROI) by:

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

Residual income is the difference between the divisional income and the cost of invested capital required to operate the division.

In general, it is better to have a higher return on investment (ROI) than a lower one.

Division B had an ROI last year of 15%. The division's minimum required rate of return is 10%. If the division's average operating assets last year were $450,000, then the division's residual income for last year was:

The Gallop Company has an asset turnover of 3.0 times, using assets of $45,000. The company also has a return on investment (ROI) of 20%. What was Gallop's operating profit margin?

Return on investment (ROI) is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue, cost, investment) into a single measure. Under which one of the following combinations of actions regarding a segment's revenues, costs, and investment would a segment's ROI always increase? (CIA adapted) Sales Equipment Investment A) Increase Decrease Increase B) Decrease Decrease Decrease C) Increase Increase Increase D) Increase Decrease Decrease

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?

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: Year Cash flows 1 1,200,000 2 \ 1,400,000 3 \ 1,620,000 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 assets had an estimated useful life of 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 gross book value? Year 1 Year 2 Year 3 A) 20.0\% 25.0\% 30.5\% B) 25.0\% 28.0\% 32.0\% C) 18.0\% 26.5\% 28.0\% D) 30.0\% 35.0\% 40.5\%

In 2020, Evans Corporation had an operating profit of $750,000 and a residual income of $300,000. If Evans' cost of capital is 15%, what is the amount of the invested capital?

Economic value added (EVA) assumes that which of the following GAAP expenses would not result in an adjustment to either the income or the capital employed?

Edinger Industries is a division of a major corporation. The following data are for the latest year of operations: Sales \ 20,760,000 Net operating income \ 2,553,480 Average operating assets \ 6,000,000 The compary's minirnum required rate of retum 16\% Required: What is the division's residual income?

The measure (ratio) that reflects the performance of a manager regarding sales and cost of goods sold, but not other operating costs and income taxes, is called the:

Bella Vista Service Co. is a computer service center. For the month of May, Bella Vista Service Co. had the following operating statistics: (CMA adapted) Sales \ 450,000 Operating income 25,000 Net profit after taxes 8,000 Total assets 500,000 Stockholder's equity 200,000 Cost of capital 6\% Based on the above information, which one of the following statements is correct?

Decentralization is lauded as important to good management. But it is not without its problems. Required: Identify the advantages and disadvantages of decentralization? How do ROI, Residual Income, and EVA affect these issues?

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

The Dry Wall Division reports the following operating data for the past two years: Year 1 Year 2 Margin 16\% ? Turnover 2.5 2.0 Average operating assets ? \ 150,000 Net operating income \ 40,000 ? Stockholders' equity \ 80,000 \ 125,000 Sales ? ? - The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2. Net operating income in Year 2 amounted to:

After-tax income divided by sales is called the:

The Nacho Division of the Tex-Mex Company has a return on investment (ROI) of 12%, sales of $200,000, and an asset turnover of 2.0. What was Nacho's operating income?