Question 1

Which one of the following measures is frequently used to evaluate the performance of the manager of an investment centre, but not profit centres?

Accepted Answer

The rate of return on funds invested in the centre is frequently used to evaluate the performance of the manager of an investment centre because these managers are responsible for managing and investing the company's funds. In contrast, profit centres are evaluated based on the amount of profit generated or the percentage increase in profit over the previous year. Controllable margin is a measure used for evaluating the performance of cost centres.

Question 2

What is the purpose of determining return on investment?

Accepted Answer

The purpose of determining return on investment is to assess the performance of an investment centre. This helps in evaluating the profitability and efficiency of the centre in generating returns from the resources invested. It provides insights that can be used to make decisions regarding the allocation of resources and investment in different projects.

Question 3

An investment centre generated a contribution margin of $200,000, fixed costs of $100,000 and sales of $1,000,000.The centre's average operating assets were $400,000.How much is the return on investment?

Accepted Answer

Return on Investment (ROI) is calculated as Net Operating Income divided by Average Operating Assets. The Net Operating Income is the Contribution Margin minus Fixed Costs, which is $200,000 - $100,000 = $100,000. Therefore, ROI = $100,000 / $400,000 = 0.25 or 25%.

Question 4

Which one of the following valuations of operating assets is not readily available from the accounting records?

Accepted Answer

Cost and book value can be easily obtained from the accounting records, as they are recorded and updated on a regular basis. Market value, however, is not readily available from the accounting records and would require additional analysis and research.

Question 5

What is included in operating assets for purposes of calculating ROI?

Accepted Answer

Operating assets for ROI calculation include all current assets and plant assets used in operations, as they are directly involved in generating revenue.

Question 6

SuitCity purchased an operating asset expected to benefit the company for 10 years for a cost of $100,000 cash.The old operating asset was fully depreciated and was kept in operations.What effect will acquiring this asset have on the performance measurement of an investment centre?

Accepted Answer

The acquisition of a new asset increases the asset base of the investment center, which can lead to a lower return on investment (ROI) initially, as the new asset has not yet contributed to income, thus having a negative effect on performance measurement.

Question 7

What effects do increases in plant assets have on ROI?

Accepted Answer

An increase in plant assets typically increases the denominator in the ROI calculation (investment base), which can reduce ROI if the increase in assets does not proportionally increase the controllable margin.

Question 8

Merck Pharmaceuticals is evaluating its Vioxx division, an investment centre.The division has a $45,000 controllable margin and $300,000 of sales.How much will Merck's average operating assets be when its return on investment is 10%?

Accepted Answer

The return on investment (ROI) is calculated as the Controllable Margin divided by the Average Operating Assets. Given a controllable margin of $45,000 and an ROI of 10%, we can set up the equation: $45,000 / Average Operating Assets = 10%. Solving for Average Operating Assets gives us $450,000.

Question 9

Which one of the following will increase return on investment?

Accepted Answer

An increase in sales will increase the revenue, which in turn will increase the return on investment. The other options will either increase the expenses or decrease the efficiency, resulting in a decrease in the return on investment.

Question 10

Which one of the following is a distinguishing characteristic of an investment centre?

Accepted Answer

An investment centre is a type of responsibility centre that has control over both revenue generation and the use of assets. Therefore, its performance can be evaluated using both profitability and return on utilizing assets as key performance indicators. Option A is incorrect because uncontrollable fixed costs may be present in other types of responsibility centres too. Option C is incorrect as investment centres generate revenues and also incur costs. Option D is incorrect because investment centres may generate revenues from selling products or providing services, depending on their nature of business.

Quiz 11: Budgetary Control and Responsibility Accounting