Deck 12: Divisional Financial Performance Measurement

Question 1

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

Answer 1

A

Question 2

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

Answer 2

A

Question 3

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

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

Answer 3

D

Question 4

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 x Required rate of return)

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

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

Question 7

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 8

Evaluating performance using ROI encourages managers to focus on

A) income and investment
B) cost efficiency and operating asset efficiency
C) both a and b
D) neither a nor b

Question 9

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 10

Average operating assets are calculated as

A) (Beginning net book value + Ending net book value)/2
B) (Beginning net book value - Ending net book value)/2
C) (Beginning fair market value + Ending fair market value)/2
D) (Beginning fair market value - Ending fair market value)/2

Question 11

Return on investment (ROI) is calculated as

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

Question 12

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 13

Assuming that the weighted average cost of capital remains the same, EVA will increase by

A) investing in a project wherein after-tax operating income is greater than the cost of capital
B) investing in a project wherein after-tax operating income is less than the cost of capital
C) increasing operating expenses
D) decreasing after-tax operating income

Question 14

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 15

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 16

Types of responsibility centres include all of the following EXCEPT

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

Question 17

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

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

Question 18

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 19

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 20

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

Question 21

The sales in the Components Division last year totaled £600,000, and its ROI was 15 percent. If the company's operating margin was 5 percent, 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 22

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 23

Figure 1
The following results for the year are for the Clark Division of First Enterprises:
Clark's average operating assets are £300,000. Clark's minimum required rate of return is 15 percent.
Refer to Figure 1. Asset turnover for the Clark Division is

A) 66.7%
B) 50.0%
C) 40.0%
D) 20.0%

Question 24

Goal congruence refers to

A) the goals of the firm being consistent with the goals of its customers
B) the goals of the suppliers being consistent with the goals of the firm
C) the goals of the individual investment centres being consistent with the goals of the firm
D) none of the above

Question 25

Figure 3
Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 6 percent.
Refer to Figure 3. 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 26

Figure 3
Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 6 percent.
Refer to Figure 3 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 27

Figure 2
The following information was reported on two projects of Dartmouth, SA.:
Refer to Figure 2. Dartmouth, SA.'s turnover for the current year is

A) 5.6
B) 13.9
C) 4
D) 2.5

Question 28

The following information was extracted from the accounting records of Florissant Valley Motors: 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 29

Figure 1
The following results for the year are for the Clark Division of First Enterprises:
Clark's average operating assets are £300,000. Clark's minimum required rate of return is 15 percent.
Refer to Figure 1. Profit margin for the Clark Division is

A) 26.7%
B) 33.3%
C) 40.0%
D) 60.0%

Question 30

The following information is provided: Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 8 percent.
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 31

The following information is provided: Assume the division's current ROI is 10 percent and the firm's minimum required rate of return is 7 percent.
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 32

Figure 1
The following results for the year are for the Clark Division of First Enterprises:
Clark's average operating assets are £300,000. Clark's minimum required rate of return is 15 percent.
Refer to Figure 1. Return on investment for the Clark Division is

A) 50.0%
B) 40.0%
C) 33.3%
D) 20.0%

Question 33

Figure 2
The following information was reported on two projects of Dartmouth, SA.:
Refer to Figure 2. Dartmouth, SA.'s margin for the current year is

A) 7.0%
B) 7.2%
C) 4.0%
D) 2.5%

Question 34

The operating margin for the Randall Company last year was 8 percent. 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 35

Figure 2
The following information was reported on two projects of Dartmouth, SA.:
Refer to Figure 2. Dartmouth, SA.'s margin for the prior year was

A) 18.0%
B) 7.2%
C) 4.0%
D) 2.5%

Question 36

A negative EVA means

A) the company is destroying capital
B) the company is increasing capital
C) ROI is negative
D) both a and c

Question 37

Figure 2
The following information was reported on two projects of Dartmouth, SA.:
Refer to Figure 2. Dartmouth, SA.'s turnover for the prior year was

A) 5.6
B) 13.9
C) 4
D) 2.5

Question 38

All of the following are considered perquisites EXCEPT

A) expense account
B) salary
C) use of company car
D) All of the above are considered perquisites.

Question 39

GreenWorld Company wants to increase its ROI from 20 percent to 25 percent 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 40

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 percent?

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

Question 41

Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
Refer to Figure 5 above. If the weighted average cost of capital is 6 percent, economic value added for the Candy Division is

A) £42,000
B) £114,000
C) £190,000
D) £360,000

Question 42

Figure 4
The following results for the year pertain to the Northern Division of Garvey Ltd.:
Refer to Figure 4 above. If Northern's average operating assets are £1,200,000 and their minimum required rate of return is 12 percent, what is the Northern Division's return on investment?

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

Question 43

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 44

Figure 6
The following results for the year pertain to the Maddox Division of Ryan Ltd.:
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent.
Refer to Figure 6. 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 45

The compensation package for divisional managers of Grant Enterprises consists of (1) a salary of £120,000, (2) a bonus of 20 percent of the increase in divisional income, and (3) stock options for 5,000 shares of Grant stock. The options permit the managers to purchase the stock at £40 per share. The Western Division reported divisional income of £1,000,000 for last year and £1,300,000 for the current year. The Western Division's manager exercised stock options for 5,000 shares of Grant stock at a current market price of £55 per share.
The total amount of compensation for the Western Division's manager is

A) £380,000
B) £320,000
C) £285,000
D) £255,000

Question 46

Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
Refer to Figure 5 The Profit margin for the Candy Division is

A) 5.0%
B) 23.1%
C) 31.7%
D) 52.8%

Question 47

The manager of a profit centre is responsible for

A) delivering a quality product or service at reasonable but minimal cost.
B) decisions to invest in capital equipment.
C) decisions regarding revenue generation.
D) both a and c

Question 48

Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
Refer to Figure 5 above. Asset turnover for the Candy Division is

A) .23
B) .28
C) .30
D) .34

Question 49

An example of an investment centre is a

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

Question 50

The compensation package for divisional managers of Grant Enterprises consists of (1) a salary of £80,000, (2) a bonus of 25 percent of the increase in divisional income, and (3) stock options for 2,000 shares of Grant stock. The options permit the managers to purchase the stock at £60 per share. The Western Division reported divisional income of £700,000 for last year and £850,000 for the current year. This year the Western Division's manager exercised stock options for 2,000 shares of Grant stock when the market price was £80 per share.
The total amount of compensation for the Western Division's manager is

A) £117,500
B) £157,500
C) £230,000
D) £237,500

Question 51

Figure 4
The following results for the year pertain to the Northern Division of Garvey Ltd.:
Refer to Figure 4. Northern's total capital employed is £1,200,000, and their weighted average cost of capital is 12 percent. Economic value added for the Northern Division is

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

Question 52

_____ 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 53

Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 percent 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 54

A firm has £1,000,000 of long-term bonds paying 8 percent interest and £3,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 12 percent. If the company's tax rate is 35 percent, what is the firm's weighted average cost of capital?

A) 11.00%
B) 7.15%
C) 10.30%
D) none of the above

Question 55

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 56

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 57

The manager of a cost centre is responsible for

A) decisions regarding costs.
B) decisions regarding revenues.
C) decisions to invest in assets.
D) both a and b

Question 58

A firm has £2,000,000 of long-term bonds paying 8 percent interest and £8,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 14 percent. If the company's tax rate is 40 percent, what is the firm's weighted average cost of capital?

A) 12.80%
B) 12.16%
C) 8.32%
D) none of the above

Question 59

Figure 6
The following results for the year pertain to the Maddox Division of Ryan Ltd.:
The weighted average cost of capital is 12 percent. The firm's minimum required rate of return is 14 percent. Taxes for the firm are 40 percent.
Refer to Figure 6 above. 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 60

Figure 5
The following results for the year are for the Candy Division of Art Enterprises:
Average operating assets are £1,200,000. The firm's minimum required rate of return is 5 percent. The tax rate for the firm is 40 percent.
Refer to Figure 5 above. Return on investment for the Candy Division is

A) 30.0%
B) 16.0%
C) 12.0%
D) 15.83%

Question 61

Beta Division had the following information: What is EVA for Beta Division?

A) £60,000
B) £48,000
C) £7,500
D) £2,000

Question 62

Ms. Morris, a divisional manager, is compensated as follows:
Ms. Morris's division reported operating income of £10,000,000 this year. On December 1, Ms. Morris exercised her stock option when the stock was selling for £15 per share.
Required:

a.
Determine the amount of Ms. Morris's bonus for this year.
b.
Determine the value of the stock option to Ms. Morris.
c.
Determine the total amount of Ms. Morris's compensation for the year.

Question 63

Compare and discuss the advantages and disadvantages of the following performance measures: ROI, EVA, and Residual Income.

Question 64

The following results for the current year are for the Grundy Division of Salmon Enterprises:
Average operating assets are £1,400,000. The firm's minimum required rate of return is 8 percent. The weighted average cost of capital is 6 percent. The division's tax rate is 30 percent.
Required:

a.
Calculate profit margin for the division.
b.
Calculate asset turnover for the division.
c.
Calculate return on investment (ROI) for the division.
d.
Calculate economic value added (EVA) for the division.

Question 65

The term "divisional margin" is used to describe the:

A) amount a given division contributes toward covering common corporate expenses.
B) sum of divisional cost of goods sold and net income.
C) excess of divisional sales over its variable manufacturing expenses.
D) excess of manufacturing margin over all variable expenses.

Question 66

Beta Division had the following information: What is the residual income for Beta Division?

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

Question 67

Doobey, Incorporated, has just formed a new division, and the following four investment opportunities are available to the division. The firm requires a minimum return of 8 percent.
Required:

a.
Calculate the return on investment (ROI) for each investment opportunity.
b.
If you were the division manager and you were evaluated based on ROI, which investment opportunity would you accept?
c.
If you were president of Doobey, Incorporated, which projects would you want the division to accept?

Question 68

a. Identify advantages of a decentralized approach to management.
b. In comparison, identify advantages of a centralized approach to management.

Question 69

Discuss the differences between centralized and decentralized decision making. Why would a firm decentralize its operations?

Question 70

Mr. Baker, a divisional manager, is compensated as follows:
Mr. Baker's division reported operating income of £5,000,000 this year. On December 1, Mr. Baker exercised his stock option when the stock was selling for £57 per share.
Required:

a.
Determine the amount of Mr. Baker's bonus for the year.
b.
Determine the value of the stock option to Mr. Baker.
c.
Determine the total amount of Mr. Baker's compensation for the year.

Question 71

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:
Any funds not invested in a project will be invested to earn the company's required minimum return of 10 percent. 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.
Required:

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.)

Question 72

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 73

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 percent.
Required:

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 74

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 75

The following results for the current year are for the Calvin Division of Stinson Enterprises:
Average operating assets are £500,000. The firm's minimum required rate of return is 10 percent, the weighted average cost of capital is 8 percent, and the tax rate is 30 percent.
Required:

a.
Calculate profit margin for the division.
b.
Calculate asset turnover for the division.
c.
Calculate return on investment (ROI) for the division.
d.
Calculate economic value added (EVA) for the division.

Question 76

Compare and contrast decentralization and centralization.

Question 77

Explain why an organization should not use only financial measures to monitor performance.

Question 78

The following information pertains to the three divisions of Marlow Company: What is the residual income for Division X?

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

Question 79

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

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

Question 80

Correll Company has two divisions, A and B. Information for each division is as follows: What is the residual income for A?

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