Exam 15: Performance Evaluation

What is meant by "decentralization?"

How is residual income calculated? What potential disadvantage is there in using residual income to evaluate and compare divisions of a company?

When a comparison of static and flexible budgets shows an unfavorable sales revenue volume variance, the variable cost volume variance will be favorable.

The research and development department of a large manufacturing company would likely be organized as

Indicate whether each of the following statements is true or false. _____ a) Managerial performance can be evaluated by comparing actual amounts with standard amounts. _____ b) Differences between standard and actual amounts are called variances. _____ c) When actual results are compared to a flexible budget based on actual volume of activity, any variances result from differences between standard and actual per unit amounts. _____ d) If the actual sales price per unit is higher than the standard, a company's sales price variance is unfavorable. _____ e) Differences between flexible budget costs and revenues and the actual results are volume variances.

For 2012, Division A of Peoria Company reported operating assets of $8,500,000, revenues of $6,800,000, and operating expenses of $5,760,000. The company has established a target return on investment (ROI) of 14% for the division. Required: a) Calculate the 2012 ROI for the division. Did the division achieve its target ROI for the year? b) For 2013, Division A managers expect that its operating assets will stay at about the same level as for 2012. Variable expenses for 2012 were $4,080,000, and the remaining expenses were fixed. The managers expect that the contribution margin ratio for 2013 will be the same as for 2012 and that the amount of fixed expenses will not change. To what level must sales increase in 2013 to achieve the target ROI?

What is a variance?

Indicate whether each of the following statements is true or false. _____ a) Margin is calculated by dividing operating income by net income. _____ b) Turnover is a measure of the profits generated from sales. _____ c) Return on investment can be improved by increasing sales, decreasing expenses, or increasing the asset base. _____ d) An increase in sales may cause a company's return on investment to increase because of the effects of fixed costs. _____ e) Return on investment combines many aspects of managerial performance into a single ratio.

Investment centers are often evaluated on the basis of return on investment.

For 2012, the New Products Division of Tellis Company had operating income of $7,000,000 and operating assets of $38,800,000. Tellis has set a target return on investment (ROI) of 14% for each of its divisions. The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year. Calculate ROI and residual income for this new product. Is the product acceptable from the company's point of view?

Home Town Grocery has invested in yogurt stands for its stores. The investment cost the company $100,000. Variable materials, preparation, and marketing costs are expected to be $.60 a unit and fixed costs are estimated at $6,000 a year. If actual sales were 20,000 servings, what would the ROI be at a sales price of $1.70?

Picard Company reported the following information for 2012: Sales \ 800,000 Average Operating Assets \ 300,000 Desired ROI 8\% Operating Income \ 50,000 The company's residual income for 2012 was

The Groovy Movie Chains has invested in Italian snack bars for their stores, where individual pizzas are prepared and sold. The investment cost the company $45,000. The company expects a sales volume for the new product to be 12,000 pizzas a year. Variable materials, preparation, and marketing costs are expected to be $1.50 a unit and fixed costs are estimated at $15,000 a year. Based on a desired 12% ROI, what should Groovy Movies charge as the selling price per pizza?

How is return on investment calculated? What are operating assets? Why are operating assets used in calculating return on investment, rather than all assets?

A cost variance is unfavorable if standard cost exceeds actual cost.

Standard cost systems and the calculation of variances facilitate the management practice known as

A variance that is favorable may indicate the existence of unfavorable conditions.

Indicate whether each of the following statements is true or false. _____ a) A variance is a difference between an expected amount and a standard amount. _____ b) When actual sales revenue exceeds the expected revenue, a company has a favorable sales variance. _____ c) A cost variance is considered to be unfavorable when actual costs are less than standard costs. _____ d) A company can calculate variances for both revenues and costs. _____ e) Flexible budgets can be used for both planning and performance evaluation.

Which of the following should not be included in the investment base used to compute residual income?

Use the following information to answer Question. Renfro Company has two divisions, the Restaurants Division and the Commissary Division. The following information was gathered for the two divisions in 2012: Restaurants Division Commissary Division Operating Income \ 4,000,000 \ 1,500,000 Operating Assets \ 30,000,000 \ 10,500,000 Hays Company has set a target return on investment (ROI) of 12% for both divisions. Restaurants and Commissary are the only divisions of Renfro Company. The company has $1,000,000 in operating assets that are not assigned to either of the divisions and $200,000 in corporate expenses that are not reflected in the information above. Based on this information, what is the ROI for the company as a whole?