Question 1

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
A)current assets.
B)working capital.
C)total assets available.
D)total assets employed.
E)based on historical costs.

Accepted Answer

The answer of If a division is evaluated using return...

Question 2

A manager can always increase his/her return on investment (ROI)by
A)reducing the asset turnover.
B)decreasing residual income.
C)increasing the operating profit margin.
D)expanding operating assets while holding sales and expenses constant.

Accepted Answer

Increasing the operating profit margin is the most effective way to increase ROI as it directly impacts the numerator of the ROI calculation (net income divided by total assets). Reducing asset turnover would decrease ROI as it reduces sales generated from assets. Decreasing residual income is not a feasible option as it is the residual earnings after deducting the cost of capital, and reducing it would lead to a negative ROI. Expanding operating assets while holding other factors constant would increase total assets, potentially diluting the ROI if operating profit margins do not increase proportionately.

Question 3

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that
A)Residual income can be computed without regard to identifying an investment base.
B)Appropriate goal congruence behavior is more likely to occur when using residual income.
C)Residual income is well accepted in many organizations and often used in the financial press.
D)ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.
E)An imputed interest rate (cost of capital)does not have to be determined when using residual income.

Accepted Answer

Residual income is considered a better measure of managerial performance than ROI because it encourages goal congruence behavior. This means that managers are incentivized to make decisions that benefit the company as a whole, rather than just focusing on maximizing their ROI. Residual income also takes into account the cost of capital, making it a more accurate measure of profitability. The other options are not correct because:

A) Residual income still requires identifying an investment base.
C) While residual income is accepted in many organizations, this is not a good reason for choosing it over ROI.
D) ROI does take into consideration the investment turnover ratio and return-on-sales percentage.
E) Residual income does require determining the cost of capital.

Question 4

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the
A)gross margin ratio.
B)profit margin ratio.
C)operating margin ratio.
D)contribution margin ratio.

Accepted Answer

Gross margin ratio measures the profitability and efficiency of a company's core operations by comparing the revenue earned by the company with the cost of goods sold to produce those goods or services. It does not include other operating costs like marketing expenses or income taxes. Therefore, it is the best choice among the given options.

Question 5

Which of the following items would not be an example of an economic value added (EVA)adjustment to eliminate accounting distortions?
A)Research & development costs
B)Advertising expenditures
C)Patent amortization
D)Common stock

Accepted Answer

Common stock is not an expense or accounting distortion that can be adjusted through EVA. It is a form of equity financing for a company and is not a direct expense that affects profitability. A, B, and C are examples of expenses that may be adjusted to eliminate accounting distortions and calculate EVA.

Question 6

After-tax income divided by sales is called the
A)gross margin ratio.
B)profit margin ratio.
C)operating margin ratio.
D)contribution margin ratio.

Accepted Answer

After-tax income divided by sales is called the profit margin ratio.

Question 7

Which of the following statement(s)is/are true? (A)If a division's return on investment (ROI)exceeds its cost of capital,then its residual income is positive.
(B)If a division's cost of capital equals its return on investment (ROI),then its residual income is zero.
A)only (A)is true
B)only (B)is true
C)both (A)and (B)are true
D)neither (A)and (B)is true

Accepted Answer

(A) is true because residual income is calculated as ROI minus cost of capital multiplied by average invested assets. If ROI exceeds cost of capital, then the residual income would be positive. 
(B) is also true because if cost of capital equals ROI, then the residual income would be zero as the calculation of residual income would result in zero. Therefore, both (A) and (B) are true.

Question 8

Which of the following should not be used for the cost of capital to compute residual income?
A)Historical weighted average cost of capital.
B)Marginal after-tax cost of new equity capital.
C)Cost of debt and equity used to finance a project.
D)Return on investment (ROI).

Accepted Answer

Return on investment (ROI) is a measure of profitability and is not used to compute the cost of capital. The cost of capital should be based on the specific sources of funds used to finance a project, such as the cost of debt and equity or the marginal after-tax cost of new equity capital. Using a historical weighted average cost of capital may not reflect the current market conditions and the cost of capital for a new project.

Question 9

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?
A)Land being held by the division as a potential site for a new plant and parking lot.
B)Division inventories when division management exercises control over the inventory levels.
C)Division accounts payable when division management exercises control over the amount of short-term credit utilized.
D)Division accounts receivable when division management exercises control over credit policy and credit terms.

Accepted Answer

Land being held by the division as a potential site for a new plant and parking lot is not typically considered part of the division's investment base. The investment base is typically composed of the assets that the division is using to generate income, such as inventory, accounts receivable, and fixed assets. Land held for future use is not being used to generate income currently, and is therefore not typically included in the investment base.

Question 10

Which of the following statement(s)is/are false? (A)Residual income can be used to compare divisions of different sizes.
(B)Residual income can be used to compare divisions that are profit centers.
A)only (A)is false
B)only (B)is false
C)both (A)and (B)are false
D)neither (A)and (B)is false

Accepted Answer

The answer of Which of the following statement(s)is/are false? (A)Residual...

Question 11

The asset turnover is a measure (ratio)of an investment center's ability to
A)earn profits.
B)generate sales.
C)control costs.
D)remain solvent.

Accepted Answer

Asset turnover is calculated as the ratio of sales to total assets. Therefore, it measures the investment center's ability to generate sales. A high asset turnover ratio indicates that the investment center is utilizing its assets efficiently to generate sales. It does not directly measure the ability to earn profits, control costs, or remain solvent.

Question 12

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.
A)accountants'
B)manager's
C)shareholder's
D)economist's
E)financial analyst's

Accepted Answer

The notion of residual income is commonly used in economics to refer to the profit that remains after all expenses, including the cost of capital, have been deducted. This concept is important to economists because it reflects the true economic profit of the project or investment, after all costs have been taken into account. While residual income may also be relevant to accountants, managers, shareholders, and financial analysts, it is primarily an economic concept.

Question 13

A division earning a profit will increase its return on investment (ROI)if it increases operating expenses and
A)sales by the same dollar amount.
B)sales by the same percentage.
C)investment by the same dollar amount.
D)investment by the same percentage.

Accepted Answer

Increasing operating expenses alone may not increase ROI, as it depends on the impact on sales. If sales remain the same, ROI will decrease. Therefore, increasing sales by the same percentage as operating expenses would result in a proportional increase in profit, leading to an increase in ROI. Increasing investment by the same percentage may also increase ROI, but this would require additional capital injection, which may not always be feasible.

Question 14

Which of the following statements is (are)true? (A)Divisional income statements do not include allocated common costs.
(B)The gross margin ratio is computed by dividing operating income by sales.
A)Only A is true.
B)Only B is true.
C)Both A and B are true.
D)Neither A nor B is true.

Accepted Answer

The answer of Which of the following statements is (are)true?...

Question 15

Return on investment (ROI)can be decomposed into the asset turnover and the
A)gross margin ratio.
B)profit margin ratio.
C)operating margin ratio.
D)contribution margin ratio.

Accepted Answer

ROI is calculated by dividing net income by total assets. Net income is the profit margin ratio (net income divided by net sales) and total assets turnover can be calculated by dividing net sales by total assets. Therefore, ROI can be decomposed into the profit margin ratio and the asset turnover.

Question 16

How will decreases in the following items affect return on investment (ROI)?
A)a
B)b
C)c
D)d

Accepted Answer

The answer of How will decreases in the following items...

Question 17

How will decreases in the following items affect residual income?
A)a
B)b
C)c
D)d

Accepted Answer

The answer of How will decreases in the following items...

Question 18

Which of the following statements does not represent a limitation of using return on investment (ROI)for measuring and evaluating performance?
A)ROI uses accounting income which is based on historical costs.
B)ROI cannot be used to compare divisions of different sizes.
C)ROI has the potential to create goal congruence problems.
D)ROI fails to align some costs incurred in one period with the benefits received in another period.

Accepted Answer

ROI can be used to compare divisions of different sizes by using Residual Income (RI) instead of ROI. Therefore, option B represents an incorrect limitation of using ROI.

Question 19

How will increases in the following items affect return on investment (ROI)?
A)a
B)b
C)c
D)d

Accepted Answer

The answer of How will increases in the following items...

Question 20

How will increases in the following items affect residual income?
A)a
B)b
C)c
D)d

Accepted Answer

The answer of How will increases in the following items...

Quiz 14: Business Unit Performance Measurement

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

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

Managerial performance can be measured in many different ways including return on investment (ROI) and residual income.A good reason for using residual income instead of ROI is that

The measure (ratio) that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the

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

After-tax income divided by sales is called the

Which of the following statement(s) is/are true? (A) If a division's return on investment (ROI) exceeds its cost of capital,then its residual income is positive. (B) If a division's cost of capital equals its return on investment (ROI) ,then its residual income is zero.

Which of the following should not be used for the cost of capital to compute residual income?

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?

Which of the following statement(s) is/are false? (A) Residual income can be used to compare divisions of different sizes. (B) Residual income can be used to compare divisions that are profit centers.

The asset turnover is a measure (ratio) of an investment center's ability to

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

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

Which of the following statements is (are) true? (A) Divisional income statements do not include allocated common costs. (B) The gross margin ratio is computed by dividing operating income by sales.

Return on investment (ROI) can be decomposed into the asset turnover and the

How will decreases in the following items affect return on investment (ROI) ?

How will decreases in the following items affect residual income?

Which of the following statements does not represent a limitation of using return on investment (ROI) for measuring and evaluating performance?

How will increases in the following items affect return on investment (ROI) ?

How will increases in the following items affect residual income?