Exam 14: Business Unit Performance Measurement

The following information is available about the status and operations for Division B of Boxwood Company, which has a minimum required ROI of 20%. Answer each item independently of the others. Division B Divisional investment \ 1,500,000 Divisional profit \ 550,000 Divisional sales \ 3,600,000 Required: a. Compute the ROI for Division B. b. Division B could increase its profit by $25,000 by increasing its investment by $100,000. Compute its new ROI. 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 ROI. 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 ROI.

Most organizations use residual income instead of return on investment (ROI) as a performance measure.

Which of the following will not result in an increase in the residual income, assuming other factors remain constant?

A problem with ratio-based measures is that managers can make decisions that improve divisional income but lower organizational performance.

A firm earning a profit can increase its return on investment by: (CMA adapted)

Divisional income statements do not have to follow generally accepted accounting principles (GAAP) because they are internal reports.

The asset turnover is a measure (ratio) of an investment center's ability to:

Three years ago, one division of the Calsone Enterprise Company purchased depreciable assets costing $2,000,000. The cash flows from these assets for the past three years have been: Year Cash flows 1 \ 600,000 2 700,000 3 810,000 Calsone uses 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, Calsone uses end-of-year balances. Required: a. What was the ROI for each year using historical cost and gross book value? b. What was the ROI for each year using historical cost and net book value?

The following information pertains to Zootime Co.'s Shelter Division for the current year: (CPA adapted) Sales \ 311,000 Variable cost \ 250,000 Traceable fixed costs \ 50,000 Average irvested capital \ 40,000 Imputed interest rate 10\% Zootime's return on investment was:

The Calculating Fashion Company has two operating divisions: North and South. The following information was collected from its financial statements. North South Operating income \ 15,375 \ 9,160 Sales 90,100 128,445 Average operating assets 47,620 37,690 Required: Compute the following ratios for each division: a. Profit margin b. Asset turnover c. Return on investment (ROI)

Radner Industries is a division of a major corporation. Last year the division had total sales of $23,380,000, net operating income of $2,828,980, and average operating assets of $7,000,000. The company's minimum required rate of return is 12%. Required: a. What is the division's margin? b. What is the division's turnover? c. What is the division's return on investment (ROI)?

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 gross book value? Year 1 Year 2 Year 3 Year 4 A) 10.0\% 9.5\% 8.0\% 7.9\% B) 10.0\% 10.0\% 10.0\% 10.0\% C) 12.5\% 11.0\% 12.0\% 15.0\% D) 10.0\% 12.5\% 14.0\% 17.0\%

The following information is available about the status and operations for Division A of Triplex Company, which has a minimum required ROI of 10%. Answer each item independently of the others. Division A Divisional investment \ 100,006 Divisional profit \ 17,500 Divisional sales \ 200,000 Required: a. Compute the residual income for Division A. b. Division A could increase its profit by $4,000 by increasing its investment by $30,000. Compute its new residual income. c. Division A could increase its profit margin ratio by one percentage point (for example: from 12% to 13%), without increasing total sales or investment. Compute its new residual income. d. Division A 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.

Residual income is a performance evaluation that is used in conjunction with, or instead of, return on investment (ROI). In many cases, residual income is preferred to ROI because: (CIA adapted)

All other things constant, which of the following would increase residual income?

How will increases in the following items affect residual income? Increase in Sales Increase in Equipment A) Decrease RI Decrease RI B) Decrease RI Increase RI C) Increase RI Decrease RI D) Increase RI Increase RI

The following information is available about the status and operations for Division B of Abad Company, which has a minimum required ROI of 20%. Answer each item independently of the others. Division B Divisional investment \ 750,000 Divisional profit \ 275,000 Divisional sales \ 1,800,000 Required: a. Compute the ROI for Division B. b. Compute the residual income for Division B. c. Division B could increase its profit by $10,000 by increasing its investment by $40,000. Compute its total residual income. d. Division B could increase its profit margin ratio by one percentage point (for example: from 10% to 11%), without increasing total sales or investment. Compute its new ROI. e. 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 ROI.

The profit margin ratio is computed by dividing after-tax income by sales.

Which of the following statements does not represent a limitation of using return on investment (ROI) for measuring and evaluating performance?

Economic value added (EVA) is a concept that is closely related to residual income. EVA is computed by: