Deck 23: Performance Evaluation and the Balanced Scorecard

Question 1

A benefit of decentralization is that it increases the difficulty of goal congruence.

Answer 1

False

Question 2

The balanced scorecard approach considers lag indicators as well as lead indicators.

Answer 2

True

Question 3

Customer satisfaction, operational efficiency, and employee excellence are the primary considerations when using the balanced scorecard approach.

Answer 3

False

Question 4

Which of the following does not accurately describe the balanced scorecard approach?

A) The approach recognizes that both financial and operational performance measures should be utilized when evaluating the company's performance.
B) The financial perspective is the most important of the four balanced scorecard perspectives and should be stressed when evaluating performance.
C) A customer satisfaction rating is relevant feedback pertaining to the balanced scorecard's customer perspective.
D) The internal business perspective is concerned with improving operations in order to satisfy customer and financial objectives.

Question 5

Which of the following is not a relevant performance indicator for the balanced scorecard's internal
Business perspective?

A) Product development time
B) Warranty claims
C) Employee turnover
D) Manufacturing defect rate

Question 6

A company's return on investment is 10% and its target rate of return is 12%. Which of the following
Statements is correct?

A) The residual income is negative.
B) The economic value added is negative.
C) The residual income is positive.
D) The economic value added is positive.

Question 7

A company's accounting department is an example of a cost center and should be evaluated based on cost control as well as other factors.

Question 8

Investment center managers are responsible for maximizing income with consideration given to the
amount of invested capital.

Question 9

The most relevant return on investment comparison for a corporation is always the comparison across its various divisions.

Question 10

Selling property, plant, and equipment at a loss will result in an increase in return on investment.

Question 11

A disadvantage of using return on investment to evaluate performance is that it can lead to suboptimal decision making from a corporate perspective.

Question 12

A positive residual income means that the return on investment exceeds the target rate of return established by management.

Question 13

The residual income approach is less likely to lead to goal congruence relative to use of the return on investment approach.

Question 14

The economic value added approach takes into consideration the cost of both equity and debt.

Question 15

When a company uses the net book value of its assets when calculating return on investment, it is possible that return on investment could increase over time even though there are not any actual improvements in operations.

Question 16

One disadvantage of the economic value added approach is its short-run focus which can lead to a lack of long-term goal congruence.

Question 17

Assume division 1 of the XYZ Company had the following results last year (in thousands). Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 5,000,000 \\\hline \text { Operating income } & \$ 1,000,000 \\\hline \text { Total assets } & \$ 10,000,000 \\\hline \text { Current liabilities } & \$ 500,000 \\\hline\end{array}$$ What is the division's capital turnover?

A) 5%
B) 10%
C) 20%
D) 50%

Question 18

Assume division 1 of the XYZ Company had the following results last year (in thousands). Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 5,000,000 \\\hline \text { Operating income } & \$ 1,000,000 \\\hline \text { Total assets } & \$ 10,000,000 \\\hline \text { Current liabilities } & \$ 500,000 \\\hline\end{array}$$ What is the division's residual income?

A) $100,000
B) $200,000
C) $500,000
D) $800,000

Question 19

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 3,000,000 \\\hline \text { Operating income } & \$ 500,000 \\\hline \text { Total assets } & \$ 4,500,000 \\\hline \text { Current liabilities } & \$ 300,000 \\\hline\end{array}$$ What is Apple division's profit margin?

A) 11.11%
B) 16.67%
C) 66.67%
D) 60%

Question 20

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 3,000,000 \\\hline \text { Operating income } & \$ 500,000 \\\hline \text { Total assets } & \$ 4,500,000 \\\hline \text { Current liabilities } & \$ 300,000 \\\hline\end{array}$$ What is Apple division's residual income?

A) $50,000
B) $140,000
C) $336,000
D) $360,000

Question 21

Assume the Apple division of the Gala Company had the following results last year (in thousands). Managements required rate of return is 10% and the weighted average cost of capital is 8%. Its effective tax rate is 30%.
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 3,000,000 \\\hline \text { Operating income } & \$ 500,000 \\\hline \text { Total assets } & \$ 4,500,000 \\\hline \text { Current liabilities } & \$ 300,000 \\\hline\end{array}$$ What is Apple division's economic value added?

A) $14,000
B) $50,000
C) $140,000
D) $336,000

Question 22

Which of the following statements pertaining to residual income is correct?

A) An increase in the amount invested in property, plant, and equipment will result in an increase in residual income.
B) An increase in the target rate of return will result in a decrease in residual income.
C) A negative residual income means that the operating income is in excess of the target rate of return.
D) A positive ROI means that the residual income must also be positive.

Question 23

Which of the following will not change a company's return on investment?

A) An increase in the company's profit margin.
B) A decrease in the company's capital turnover.
C) An increase in the company's required rate of return.
D) A decrease in property, plant, and equipment.

Question 24

Which of the following will not result in an increase in both return on investment and residual
Income?

A) An increase in the unit selling price.
B) A decrease in variable manufacturing costs.
C) A decrease in property, plant, and equipment.
D) A decrease in the minimum required rate of return.

Question 25

Diamond Company has provided the following information:
Total assets: $100,000
Profit margin: 20%
Turnover: .25
Minimum acceptable return: 10%
What is Diamond's return on investment?

A) 10%
B) 20%
C) 5%
D) 2.5%

Question 26

Match Corporation has provided the following information:
Total assets: $200,000
Profit margin: 30%
Turnover: .20
Minimum acceptable return: 12%
What is Match's return on investment?

A) 6%
B) 30%
C) 18%
D) 2.4%

Question 27

Match Corporation has provided the following information:
Total assets: $200,000
Profit margin: 10%
Turnover: .20
Minimum acceptable return: 12%
Operating income: $30,000
What is Match's residual income?

A) $4,000
B) $6,000
C) $10,000
D) $24,000

Question 28

Return on investment is calculated by dividing:

A) operating income by total assets.
B) net income by total assets.
C) operating income by operating assets.
D) net income by operating assets.

Question 29

The capital turnover ratio is calculated by dividing:

A) sales by stockholders' equity.
B) net income by total assets.
C) sales by total assets.
D) net income by stockholders' equity.

Question 30

Return on investment is calculated by:

A) multiplying the profit margin by investment turnover.
B) multiplying total assets by the target rate of return.
C) dividing profit margin by investment turnover.
D) dividing sales by total assets.

Question 31

The Beech Division had a return on investment of 16% last year. Which of the following investment
Opportunities would Beech's management consider for the upcoming year given that Beech's
Management is evaluated using return on investment?

A) Any investment with a positive operating income
B) Any investment with a return greater than the minimum rate of return
C) Any investment with a positive return on investment
D) Any investment with a return on investment of at least 16%

Question 32

The management of Mullen Division has provided the following information:
Operating assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum desired rate of return is 10%. Should Mullen's management invest in the project if management is evaluated using residual income?

A) Yes, because the operating income is positive.
B) No, because the return on investment for the project is less than Mullen's current return on investment.
C) No, because the investment will lower Mullen's residual income.
D) Yes, because the project's return on investment exceeds the minimum desired rate of return.

Question 33

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. Which of the following statements is incorrect?

A) The impact of the investment on Mullen's capital turnover can't be determined given the information provided.
B) Mullen's residual income will increase if the investment in the project is made.
C) Mullen's return on investment will increase if the investment in the project is made.
D) Mullen's residual income will increase because the project's return on investment exceeds the minimum acceptable rate of return.

Question 34

The management of Mullen Division has provided the following information:
Total assets: $600,000
Operating income: $90,000
Sales: $300,000
Management is considering investing in an additional project costing $60,000; it is estimated that the project will create operating income of $7,200. Mullen's minimum acceptable rate of return is 10%. How much is Mullen's overall residual income if the investment is made?

A) $31,200
B) $1,200
C) $61,200.
D) $47,200

Question 35

Which of the following is not taken into consideration when calculating return on investment?

A) Profit margin
B) Capital turnover
C) Target rate of return
D) Sales

Question 36

Which of the following is not taken into consideration when calculating residual income?

A) Operating income
B) Minimum target rate of return
C) Total assets
D) Capital turnover

Question 37

Which of the following is not taken into consideration when calculating economic value added?

A) After-tax operating income
B) Current liabilities
C) Total assets
D) Minimum target rate of return

Question 38

Waddington Corporation currently has a return on investment of 12%. The Madrid division is reporting residual income of $1,000,000 and a 14% return on investment. The Madrid division is contemplating an investment opportunity which has an 11% return on investment and a positive residual income. Should Madrid division's management make the investment if goal congruence is important to the Waddington Corporation?

A) No, because Waddington Corporation's return on investment will decrease.
B) No, because Madrid division's return on investment will decrease.
C) Yes, because Waddington Corporation's residual income will increase.
D) Yes, because Waddington Corporation will be better off if any investment with a positive return on investment is made.

Question 39

Canton Corporation currently has a return on investment of 14%. The Potsdam division is reporting residual income of $500,000 and a 12% return on investment. The Potsdam division is contemplating an investment opportunity which has a 13% return on investment and a positive residual income. Should Potsdam division's management make the investment if goal congruence is important to the Canton Corporation?

A) Yes, because Potsdam division's return on investment will increase.
B) No, because Canton Corporation's return on investment will decrease.
C) Yes, because Canton Corporation's residual income will increase.
D) No, because Canton Corporation's residual income will decrease as a result of accepting an investment opportunity with a return on investment less than 14%.

Question 40

Norwood Company has a return on investment of 10%, operating income of $200,000, and a capital turnover of 4.0. How much were Norwood's total assets?

A) $2,000,000
B) $800,000
C) $8,000,000
D) $20,000

Question 41

Norwood Company has a return on investment of 10%, operating income of $200,000, and a capital turnover of 4.0. How much were Norwood's sales?

A) $10,000,000
B) $8,000,000
C) $2,000,000
D) $200,000

Question 42

Madrid Company has a return on investment of 12.5%, sales of $4,000,000, and a profit margin of 5%. How much were Madrid's total assets?

A) $1,600,000
B) $2,000,000
C) $500,000
D) $4,000,000

Question 43

Hancock Corporation has a capital turnover of 2, sales of $500,000, and a return on investment of 4%. What was Hancock's operating income??

A) $250,000
B) $500,000
C) $10,000
D) $20,000

Question 44

Profile Corporation has total assets of $600,000, an 11% target rate of return, and a residual income of
$6,000. Which of the following statements is incorrect?

A) Profile's return on investment was 12%
B) Profile's operating income was $66,000.
C) Profile's residual income would increase $6,000 if the target rate of return was reduced to 10%.
D) Profile's return on investment will not change when the target rate of return changes.

Question 45

Crimpy Company has total assets of $900,000, a 10% target rate of return, and a residual income of ($4,500). Which of the following statements is correct?

A) Crimpy's return on investment can't be determined given the information provided.
B) Crimpy's operating income was $85,500.
C) Crimpy's residual income would decrease $9,000 if the target rate of return was reduced to 9%.
D) Crimpy's return on investment will increase when the target rate of return decreases.

Question 46

Grand Company has total assets of $700,000, a 12% target rate of return, a return on investment of 14%, and a 10% weighted average cost of capital. What is Grand's residual income?

A) $14,000
B) $84,000.
C) $98,000
D) $28,000

Question 47

Gallop Company has total assets of $600,000, a 10% target rate of return, a return on investment of 12%, an 8% weighted average cost of capital, and current liabilities of $100,000. What is Gallop
Company's economic value added assuming that the income tax rate is 40%?

A) $3,200
B) $32,000.
C) -$4,800
D) -$6,800

Question 48

Marx Company has total assets of $400,000, a 14% target rate of return, a $10,000 residual income, a 10% weighted average cost of capital, and current liabilities of $80,000. What is Marx Company's
economic value added assuming that the income tax rate is 30%?

A) $1,400
B) $11,200
C) $6,200
D) $14,200

Question 49

Herb Corporation has provided the following information:
$$\begin{array} { | l | l | } \hline \text { Current assets } & \$ 200,000 \\\hline \text { Total assets } & \$ 750,000 \\\hline \text { Total liabilities } & \$ 300,000 \\\hline \text { Current liabilities } & \$ 100,000 \\\hline \text { Weighted average cost of capital } & 10 \% \\\hline \text { Operating income } & \$ 140,000 \\\hline \text { Target rate of return } & 12 \% \\\hline \text { Income tax rate } & 40 \% \\\hline\end{array}$$

A) $65,000
B) $19,000
C) $50,000
D) $6,000

Question 50

Herb Corporation has provided the following information:
$$\begin{array} { | l | l | } \hline \text { Current assets } & \$ 200,000 \\\hline \text { Total assets } & \$ 750,000 \\\hline \text { Total liabilities } & \$ 300,000 \\\hline \text { Current liabilities } & \$ 100,000 \\\hline \text { Weighted average cost of capital } & 10 \% \\\hline \text { Operating income } & \$ 140,000 \\\hline \text { Target rate of return } & 12 \% \\\hline \text { Income tax rate } & 40 \% \\\hline\end{array}$$ What is Herb Corporation's residual income?

A) $74,000
B) $62,000
C) $50,000
D) $65,000

Question 51

Which of the following transactions will result in an increase in economic value added?

A) The acquisition of a new building in exchange for common stock
B) An increase in the weighted average cost of capital
C) Using cash to pay a long-term liability
D) Issuing long-term bonds payable in exchange for cash

Question 52

Which of the following statements regarding the weighted average cost of capital is incorrect?

A) The weighted average cost of capital considers the rate of return required by long-term creditors.
B) The weighted average cost of capital considers the rate of return required by investors.
C) The weighted average cost of capital represents the minimum rate of return required by investors and long-term creditors.
D) There is an inverse relationship between the weighted average cost of capital and business risk.

Question 53

Assuming a constant target rate of return and weighted average cost of capital, which of the following
Transactions will result in an increase in both residual income and economic value added?

A) Issuing bonds in exchange for cash
B) Issuing stock in exchange for a patent
C) Using cash to pay off a long term liability
D) Using cash to acquire new equipment

Question 54

The Gnome Company has provided the following information:
$$\begin{array} { | l | l | } \hline \text { Income tax rate } & 30 \% \\\hline \text { Target rate of return } & 12 \% \\\hline \text { Total assets } & \$ 300,000 \\\hline \text { Total liabilities } & \$ 150,000 \\\hline \text { Current liabilities } & \$ 50,000 \\\hline \text { Operating income } & \$ 40,000 \\\hline \text { Economic value added } & \$ 3,000 \\\hline\end{array}$$ What was Gnome's weighted average cost of capital?

A) 8%
B) 10%
C) 14%
D) 12%

Question 55

Capital turnover is decreased when:

A) sales increase.
B) new assets are purchased.
C) expenses decrease.
D) stock is issued to pay a debt.

Question 56

A decrease in the income tax rate will:

A) increase residual income.
B) increase return on investment.
C) increase economic value added.
D) not affect economic value added.

Question 57

The residual income formula is:

A) net operating income minus the minimum required rate of return on operating assets.
B) net operating income minus the minimum required rate of return on total assets.
C) net income minus the minimum required return on stockholders' equity.
D) contribution margin minus the minimum required rate of return on operating assets.

Question 58

Which of the following is irrelevant with respect to calculating economic value added?

A) The income tax rate.
B) Current liabilities
C) The minimum required rate of return
D) Total assets