Deck 19: Divisional Financial Performance Measures

Question 1

The Marketing Department is most likely considered to be a(n)

A)profit centre.
B)revenue centre.
C)investment centre.
D)cost centre.

Answer 1

B

Question 2

Investment centre managers would be evaluated based on

A)operating income of the profit centre.
B)return on investment.
C)economic value added.
D)all of the above.

Answer 2

D

Question 3

A disadvantage of ROI is

A)it leads to goal incongruence.
B)its short-run focus.
C)its focus on divisional profit rather than overall profit of the firm.
D)all of the above.

Answer 3

D

Question 4

What is an advantage of using economic value added (EVA) in performance measurement over return on investment (ROI)?

A)It is easier to calculate.
B)It encourages investments that are profitable to the company.
C)both a and b
D)none of the above

Question 5

The evaluation of investment centres and the evaluation of the managers who run them

A)should be the same evaluation.
B)should be separate evaluations.
C)should be done quarterly.
D)None of the above are correct.

Question 6

Types of responsibility centres include all of the following EXCEPT

A)profit centres.
B)contribution centres.
C)investment centres.
D)cost centres.

Question 7

Economic value added (EVA) is

A)a monetary figure.
B)a percentage rate of return.
C)negative if the company is creating capital.
D)none of the above.

Question 8

Return on investment (ROI) is calculated as

A)Divisional operating income/Divisional investment.
B)Divisional investment - Division income.
C)Divisional investment/Divisional operating income.
D)Divisional income - (Divisional investment *Required rate of return).

Question 9

Which of the following measures should companies use for performance evaluation?

A)ROI
B)EVA
C)nonfinancial measures such as market share and customer's complaints
D)all of the above

Question 10

Profit centre managers would be evaluated based on

A)operating income of the profit centre.
B)return on investment.
C)economic value added.
D)all of the above.

Question 11

Advantages of decentralization include all of the following EXCEPT

A)divisional management is able to react to changing market conditions more rapidly than top management.
B)divisional management is a source of personnel for promotion to top management positions.
C)decentralization can motivate divisional managers.
D)decentralization permits divisional management to concentrate on firmwide problems and long-range planning.

Question 12

Assuming all other things are equal, a company's ROI would decrease when

A)operating expenses increase.
B)operating income increases.
C)average operating assets decrease.
D)operating expenses decrease.

Question 13

The following information is provided: $\begin{array}{crc}\text { Froject } & \text { Income } & \text { Investment } \\\mathrm{A} & £ 33,000 & £ 300,000 \\\mathrm{~B} & 56,250 & 750,000 \\\mathrm{C} & 27,500 & 550,000\end{array}$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept?

A)Projects A, B, and C
B)Projects A and C
C)Projects A and B
D)Project A only

Question 14

The Production Department is most likely considered to be a(n)

A)profit centre.
B)contribution centre.
C)investment centre.
D)cost centre.

Question 15

The following information is provided: $\begin{array}{rrr}& \text { Operating } & \text { Average Operating } \\\text { Froject } & \text { Income } & \text { Investment }\\\hline\text {A }& £ 44,000 & £ 400,000 \\\text { B } & 70,000 & 800,000 \\\text { C } & 30,000 & 600,000\end{array}$
Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 8 per cent.

If you were the division manager and you were evaluated based on ROI, which projects would you accept?

A)Projects A, B, and C
B)Projects A and C
C)Projects A and B
D)Project A only

Question 16

Return on investment (ROI) is calculated as

A)Operating income/Average operating assets.
B)(Operating income/Sales) *(Sales/Average operating assets).
C)Operating income margin *Operating asset turnover.
D)all of the above.

Question 17

In order to promote goal congruence, a manager of an investment centre is best evaluated using

A)standard variable costing income statements.
B)budgets and standard costs.
C)return on investment.
D)economic value added.

Question 18

Return on investment can be broken into two components:

A)profit margin and asset turnover.
B)contribution margin and asset turnover.
C)segment margin and asset turnover.
D)profit margin and inventory turnover.

Question 19

Economic value added (EVA) is

A)before-tax operating income minus the total annual cost of capital.
B)after-tax operating income minus the total annual cost of capital.
C)after-tax operating income minus the before-tax cost of debt.
D)none of the above.

Question 20

Decentralization occurs when

A)the firm's operations are located over a large geographic area to reduce risk.
B)authority for important decisions is delegated to lower segments of the organization.
C)important decisions are made at the upper levels and the lower levels of the organization are responsible for implementing the decisions.
D)None of the above are correct.

Question 21

Figure 19-3
The following results for the year pertain to the Maddox Division of Ryan Ltd.: $\begin{array}{lr}\text { Sales } & E 640,000 \\\text { Variable expenses } & 160,000 \\\text { Fixed expenses } & 300,000\end{array}$ The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent.

-Refer to Figure 19-3. If average operating assets are £1,000,000, return on investment for the Maddox Division is

A)48%.
B)34%.
C)18%.
D)16%.

Question 22

Figure 19-1 $$\begin{array} { c c c } \text { Project } & \text { Income } & \text { Investment } \\\text { A } & £ 40,000 & £ 800,000 \\\text { B } & 44,000 & 400,000 \\\text { C } & 46,875 & 625,000\end{array}$$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent.

-Refer to Figure 19-1 above. If you were the president of the firm, which projects would you want the division manager to accept?

A)Projects A, B, and C
B)Projects B and C
C)Project A only
D)Project B only

Question 23

Figure 19-3
The following results for the year pertain to the Maddox Division of Ryan Ltd.: $\begin{array}{lr}\text { Sales } & E 640,000 \\\text { Variable expenses } & 160,000 \\\text { Fixed expenses } & 300,000\end{array}$ The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent.

-Refer to Figure 19-3. If the total capital employed by the Maddox Division is £800,000, what is the economic value added (EVA)?

A)£12,000
B)£96,000
C)£108,000
D)£180,000

Question 24

The EVA of Credit Financial's African Division was (£15,000) last year. If after-tax income is £60,000 and the capital employed totaled £500,000, what is the weighted average cost of capital?

A)15%
B)3%
C)12%
D)9%

Question 25

The following information was extracted from the accounting records of Florissant Valley Motors: $\begin{array}{lcc} & \text { Prior Year } & \text { Current Year } \\\text { Margin } & 6.0 & 5.0 \\\text { Tumover } & 2.5 & 3.2\end{array}$ Florissant Valley's ROI for the current year is

A)greater than for the prior year due to the change in turnover.
B)greater than for the prior year due to the change in margin.
C)less than for the prior year due to the change in turnover.
D)less than for the prior year due to the change in margin.

Question 26

____ exists when the major functions of organization are controlled by top management.

A)Decentralization
B)Centralization
C)Optimization
D)An unfavorable overhead variance

Question 27

A possible disadvantage of a decentralized organization is that

A)decisions are made more slowly.
B)divisional managers are less motivated.
C)divisional managers are not specialized.
D)divisional managers will run their divisions to benefit themselves at the expense of suboptimizing the entire organization.

Question 28

Figure 19-1 $$\begin{array} { c c c } \text { Project } & \text { Income } & \text { Investment } \\\text { A } & £ 40,000 & £ 800,000 \\\text { B } & 44,000 & 400,000 \\\text { C } & 46,875 & 625,000\end{array}$$ Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent.

-Refer to Figure 19-1. If you were the division manager and you were evaluated based on ROI, which projects would you accept?

A)Projects A, B, and C
B)Projects A and B
C)Projects B and C
D)Project B only

Question 29

Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 per cent and if last year's after-tax income was £50,000, then EVA for the Asian Division last year was

A)£2,500.
B)£37,500.
C)£12,500.
D)£7,500.

Question 30

Figure 19-2
The following results for the year pertain to the Northern Division of Garvey Ltd.: $\begin{array}{lr}\text { Sales } & £ 400,000 \\\text { Taxes } & 60,000 \\\text { Operating income after taxes } & 160,000\end{array}$

-Refer to Figure 19-2. Northern's total capital employed is £1,200,000, and their weighted average cost of capital is 12 per cent. Economic value added for the Northern Division is

A)£240,000.
B)£144,000.
C)(£104,000).
D)£16,000.

Question 31

____ is the delegation of decision-making authority to successively lower management levels in an organization.

A)Decentralization
B)Centralization
C)Optimization
D)An unfavorable overhead variance

Question 32

An example of an investment centre is a

A)production department.
B)company.
C)marketing department.
D)credit department.

Question 33

Figure 19-2
The following results for the year pertain to the Northern Division of Garvey Ltd.: $\begin{array}{lr}\text { Sales } & £ 400,000 \\\text { Taxes } & 60,000 \\\text { Operating income after taxes } & 160,000\end{array}$

-Refer to Figure 19-2. If Northern's average operating assets are £1,200,000 and their minimum required rate of return is 12 per cent, what is the Northern Division's return on investment?

A)33.3%
B)18.3%
C)13.3%
D)12.0%

Question 34

GreenWorld Company wants to increase its ROI from 20 per cent to 25 per cent in the current year. They cannot increase operating income and sales from the previous year's levels of £50,000 and £1,200,000, respectively. To increase ROI, GreenWorld should

A)make additional investments of £25,000.
B)sell obsolete inventory for £10,000 and use the proceeds to pay off debts.
C)sell obsolete inventory for £50,000 and use the proceeds to pay off debts.
D)GreenWorld can't increase ROI.

Question 35

If Dixie Company has sales of £1,200,000 and operating assets of £600,000, what operating margin will they have to earn to generate an ROI of 20 per cent?

A)5%
B)7.5%
C)10%
D)20%

Question 36

The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was

A)25%.
B)20%.
C)16%.
D)10%.

Question 37

The sales in the Components Division last year totaled £600,000, and its ROI was 15 per cent. If the company's operating margin was 5 per cent, then its average operating assets must have been

A)£4,000,000.
B)£200,000.
C)££60,000.
D)It cannot be determined from the information given.

Question 38

Which of the following is a disadvantage of both residual income and ROI?

A)They are both absolute measures of return.
B)They both are difficult to calculate.
C)They both do not discourage myopic behaviour.
D)All of the above are disadvantages of both ROI and residual income.

Question 39

The manager of an investment centre is responsible for

A)decisions regarding costs.
B)decisions regarding revenues.
C)decisions to invest in assets.
D)all of the above.

Question 40

Which of the following departments would NOT be a cost centre?

A)advertising department
B)city police department
C)building and grounds department
D)sales department

Question 41

The following information pertains to the three divisions of Marlow Company: $\begin{array}{lrrr}&\text { Division } X & \text { Division } Y & \text { Division } Z \\\text { Sales } & ? & ? & 1,250,000 \\\text { Net operating income } & £ 36,000 & £ 25,000 & £ 75,000 \\\text { Average operating assets } & 300,000 & ? & ? \\\text { Return on investment } & ? & 20 \% & 15 \% \\\text { Margin } & 0.10 & 0.05 & ? \\\text { Turnover } & 1.5 & ? & ? \\\text { Target ROI } & 15 \% & 12 \% & 10 \%\end{array}$ What is the residual income for Division X?

A)£36,000
B)£45,000
C)£(9,000)
D)£(36,000)

Question 42

O'Neil Company requires a return on capital of 15 per cent. The following information is available for 2011: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Division } \mathrm{X} \quad\quad\quad\quad\quad\quad \text { Division } Y \quad\quad\quad\quad\quad \text { Division } \mathrm{Z}$
$\begin{array}{lrrrrrr}&\text { Book }& \text { Current } & \text { Book } &\text { Current }& \text { Book } &\text { Current }\\\hline\text { Sales } & £ 200,000 & £ 200,000 & £ 400,000 & £ 400,000 & £ 600,000 & £ 600,000 \\\text { Income } & 24,000 & 20,000 & 32,000 & 34,000 & 37,500 & 39,000 \\\text { Assets } & 120,000 & 160,000 & 180,000 & 200,000 & 450,000 & 435,000\end{array}$

A)Compute return on investment using both book and current values for each division. (Round answer to three decimal places.)
B)Compute residual income for both book and current values for each division.
C)Does book value or current value provide the better basis for performance evaluation?
D)Which division do you consider the most successful?

Question 43

The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the following four investment opportunities available to the division. Parkes, Incorporated, requires a minimum return of 10 per cent. $$\begin{array}{l}\text { Investment }\\\begin{array} { c r c } \text { Opportunity } & { \text { Income } } & \text { Investment } \\\hline 1 & £ 91,000 & £ 650,000 \\2 & 63,000 & 700,000 \\3 & 59,400 & 540,000 \\4 & 117,600 & 980,000\end{array}\end{array}$$
a.Calculate the return on investment (ROI) for each investment opportunity.
b.If only one investment opportunity can be funded and the division is evaluated based on ROI, which investment opportunity would be accepted?
c.If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible performance, which investments would be accepted?

Question 44

Figure 19-4
Beta Division had the following information: $\begin{array}{lr}\text { Asset base in Beta Division } & £ 400,000 \\\text { Net income in Beta Division } & £ 50,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Beta Division } & 20 \%\end{array}$

-Refer to Figure 19-4. What is the residual income for Beta Division?

A)£60,000
B)£48,000
C)£7,500
D)£(10,000)

Question 45

Stevens Company has two divisions that report on a decentralized basis. Their results for 2011 were as follows: $\begin{array}{lcc}&\text { Helmet } & \text { Ball } \\\text { Sales } & £ 150,000 & £ 300,000 \\\text { Income } & £ 15,000 & £ 45,000 \\\text { Asset base } & £ 75,000 & £ 150,000 \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$
a.Return on investment (ROI) if the desired rate of return is 12 per cent.
b.Residual income if the desired rate of return is 20 per cent.
c.EVA.
d.Turnover if the desired rate of return is 25 per cent.
e.Margin for each division if the desired rate of return is 10 per cent.

Question 46

Correll Company has two divisions, A and B. Information for each division is as follows: $\begin{array}{lcc}&A&B\\\text { Net earnings for divi sion } & £ 40,000 & £ 260,000 \\\text { Asset base for division } & £ 100,000 & £ 1,200,000 \\\text { Target rate of return } & 15 \% & 18 \% \\\text { Margin } & 10 \% & 20 \% \\\text { Weighted average cost of capital } & 12 \% & 12 \%\end{array}$ What is the residual income for A?

A)£40,000
B)£25,000
C)£15,000
D)£28,000

Question 47

Figure 19-4
Beta Division had the following information: $\begin{array}{lr}\text { Asset base in Beta Division } & £ 400,000 \\\text { Net income in Beta Division } & £ 50,000 \\\text { Weighted average cost of capital } & 12 \% \\\text { Target ROI } & 15 \% \\\text { Margin for Beta Division } & 20 \%\end{array}$

-Refer to Figure 19-4. What is EVA for Beta Division?

A)£60,000
B)£48,000
C)£7,500
D)£2,000

Question 48

TotToys Ltd. recently made £2,000,000 of capital available to its Toddler Division. The manager of the Toddler Division is evaluating the possibility of investing the additional funds in two new toys. Information about the two new toys is as follows: $\begin{array}{lrr}&\text { Toy \#1 } & \text { Toy \#2 } \\\text { Frojected investment } & £ 900,000 & £ 750,000 \\\text { Expected operating income } & 144,000 & 90,000\end{array}$ Any funds not invested in a project will be invested to earn the company's required minimum return of 10 per cent. Without the additional investment, the Toddler Division's average operating assets would have been £10,000,000, and its operating income would have been £1,400,000.
a.Compute the Toddler Division's operating income and ROI, assuming that the division manager rejects both projects.
b.Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #1 project.
c.Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #2 project.
d.Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts both projects.(Round all computations to the nearest two decimal places.)