Exam 14: Business Unit Performance Measurement

The FGH 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 the company's operating profit margin?

How will increases in the following items affect residual income?

The ABC Company has three divisions: A Division,B Division,and C Division. What was A Division's residual income last year?

Level return on investments (ROI)over the life of a long-term project is more likely when ROI is computed using:

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?

The following information pertains to Quest Co.'s Gold Division for the current year: (CPA adapted) Quest's return on investment was:

If a division is evaluated using return on investment (ROI)without regard to how assets are financed,the denominator in the ROI calculation will be:

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

Using net book values instead of gross book values to compute return on investment (ROI)might encourage an investment center manager to delay replacing inefficient assets until they are fully depreciated.Book value decreases as the asset ages.Replacing an asset replaces a lower net investment with a larger one.

Rayburn 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?

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).GAAP is not a relevant concern for either ROI or residual income.

A company purchased assets costing $200,000 which will be depreciated over 5-years using straight-line depreciation and no salvage value.The company 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?

In general,a division's investment base includes an allocated share of the corporate headquarters' assets.The goal is controllable investment,so corporate costs should not be allocated.

A division earning a profit will increase its return on investment (ROI)if it increases operating expenses and:

A problem with ratio-based measures is that managers can make decisions that improve divisional income but lower total organizational income.This is the problem of suboptimization.

Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI)because: (CMA adapted)

Which of the following items would not be an example of an economic value added (EVA)adjustment to eliminate accounting distortions?

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

The ABC Company has three divisions: A Division,B Division,and C Division. What was C Division's cost of capital last year?

Like return on investment (ROI),economic value added (EVA)adjustments fail to sufficiently address the sub-optimization problem.Both ROI and EVA are ratio-based measures,which gives rise to suboptimization.