Exam 12: Organizational Structure and Performance Measurement

Reference: 12-10 Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -The minimum required rate of return for the past year was?

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -Residual income is income plus an imputed interest charge for the investment.

Reference: 12-12 The Sherlock Division recorded operating data as follows for the past year: Sales \ 300,000 Operating expenses 225,000 Average operating assets 225,000 Stockholders' equity 80,000 Minimum required rate of return 20\% -For the past year, residual income was?

Reference: 12-12 The Sherlock Division recorded operating data as follows for the past year: Sales \ 300,000 Operating expenses 225,000 Average operating assets 225,000 Stockholders' equity 80,000 Minimum required rate of return 20\% -In computing the margin in a ROI analysis, which of the following is used in the denominator?

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -Transfer prices that one segment of an organization charges other segments of the same organization are always the costs of the goods or services provided.

Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? I. Net book value is consistent with how plant and equipment items are reported on a balance sheet. II. Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense. III. Net book value allows ROI to decrease over time as assets get older.

Reference: 12-06 The Baily Division recorded operating data as follows for the past two years: Year 1 Year 2 Sales ? \ 1,200,000 Stockholders' equity \ 540,000 720,000 Average operating assets \ 600,000 ? Margin 15\% ? Return on investment 22.5\% 18\% Baily Division's turnover was exactly the same in both Year 1 and Year 2. -Sales and average operating assets for Company P and Company Q are given below: Sales Average Operating Assets Company P \ 20,000 \ 8,000 Company Q \ 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%?

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -Profit centre managers are authorized to make decisions about pricing, production, operations and capital acquisitions.

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -For purposes of determining the costs to be included in each segment's performance evaluations, in general common fixed costs should be allocated to each segment and traceable fixed costs should not be assigned to segments.

Reference: 12-10 Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -Emiley Inc., newly incorporated on January 2, earned $100,000 in net operating income in its first year of operations which ended December 31. Operating assets, which increased evenly throughout the year, totalled $200,000 at year end. ROI for the year was?

Reference: 12-06 The Baily Division recorded operating data as follows for the past two years: Year 1 Year 2 Sales ? \ 1,200,000 Stockholders' equity \ 540,000 720,000 Average operating assets \ 600,000 ? Margin 15\% ? Return on investment 22.5\% 18\% Baily Division's turnover was exactly the same in both Year 1 and Year 2. -The average operating assets in Year 2 were?

Reference: 12-07 The following selected data pertain to the belt division of Allen Corp. for last year: Sales \ 500,000 Average operating assets \ 200,000 Net operating income \ 80,000 Turnover 2.5 Minimum required return 20\% -In 2003 the real estate market experienced an all-time high revenue with a net income of $45 billion with investment of $10 billion. What is the ROI for the real estate industry?

Reference: 12-07 The following selected data pertain to the belt division of Allen Corp. for last year: Sales \ 500,000 Average operating assets \ 200,000 Net operating income \ 80,000 Turnover 2.5 Minimum required return 20\% -How much is the return on investment?

$\text { Reference: } 12 - 12$ The Sherlock Division recorded operating data as follows for the past year: Sales \ 300,000 Operating expenses 225,000 Average operating assets 225,000 Stockholders' equity 80,000 Minimum required rate of return 20\% -Reed Company's sales last year totalled $150,000 and its return on investment (ROI)was 12%. If the company's turnover was 3, then its net operating income for the year must have been?

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -The use of return on investment as a sole performance measure may lead managers to make decisions that are not in the best interests of the company as a whole.

Reference: 12-05 The Holmes Division recorded operating data as follows for the past year: Sales \ 200,000 Net operating income 25,000 Average operating assets 100,000 Stockholders' equity 80,000 Residual income 13,000 -For the past year, the margin was?

Reference: 13-02 Financial statements for Larned Company appear below: Larned Company Balance Sheet December 31, 20X6 and 20X5 (dollars in thousands) 20X6 20\times5 Current assets: Cash and marketable securities \ 130 \ 100 Accounts receivable, net 150 130 Inventory 100 100 Prepaid expenses 20 20 Total current assets 400 350 Noncurrent assets: Plant \& equipment, net 1,640 1,600 Plant \& equipment, net 1,640 1,600 Total assets \ 2,040 \ 1,950 Current liabilities: Accounts payable \ 120 \ 120 Accrued liabilities 110 80 Notes payable, short term 170 160 Total current liabilities 400 360 Noncurrent liabilities: Bonds payable 370 400 Total liabilities 770 760 Shareholders' equity: Preferred shares, \2 0 par, 10\% 120 120 Common shares, \1 0 par 180 180 Additional paid-in capital--common shares 110 110 Retained earnings 860 780 Total shareholders' equity 1,270 1,190 Total liabilities \& shareholders' equity \ 2,040 \ 1,950 Larned Company Income Statement For the Year Ended December 31, 20X6 (dollars in thousands) Sales (all on account) \ 2,930 Cost of goods sold 2,050 Gross margin 880 Operating expenses 350 Net operating income 530 Interest expense 40 Net income before taxes 490 Income taxes (30\%) 147 Net income \ 343 Dividends during 20X6 totalled $263 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 20X6 was $160. Included in operating expenses was depreciation expense of $20,000. 7 -The performance of the manager of Division A is measured by residual income. of the following would increase the manager's performance measure?

$\text { Reference: } 12 - 10$ Harstin Corporation has provided the following data: Sales \ 625,000 Gross margin 70,000 Net operating income 50,000 Stockholders' equity 90,000 Average operating assets 250,000 Residual income 20,000 -The margin for the past year was?

Reference: 12-06 The Baily Division recorded operating data as follows for the past two years: Year 1 Year 2 Sales ? \ 1,200,000 Stockholders' equity \ 540,000 720,000 Average operating assets \ 600,000 ? Margin 15\% ? Return on investment 22.5\% 18\% Baily Division's turnover was exactly the same in both Year 1 and Year 2. -Suppose a manager's performance is to be measured by residual income. Which of the following will not result in an increase in the residual income figure for this manager, assuming other factors remain constant?

Reference: 12-02 The following data are available for the South Division of Redride Products, Inc. and the single product it makes: Unit selling price \ 20 Variable cost per unit \ 12 Annual fixed costs \ 280,000 Average operating assets \ 1,500,000 -A company's return on investment is the: