Question 1

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also to the total magnitude of operating income earned by each division.

Accepted Answer

Residual income takes into account both the minimum required rate of return on investment and the actual operating income, allowing for a comprehensive assessment of a division's performance by considering the excess income generated over the minimum required return.

Question 2

In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets.

Accepted Answer

This statement is true. The investment turnover component of ROI analysis measures how efficiently a company is using its assets to generate sales. It calculates the rate at which sales are being generated for each dollar of invested assets, which is an important factor in assessing the overall profitability of an investment.

Question 3

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Accepted Answer

Profit margin is calculated as operating income divided by sales. In this case, operating income is $6,000 and sales are $30,000, so the profit margin is $6,000 / $30,000 = 20%.

Question 4

The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.

Accepted Answer

The profit margin component of ROI analysis is used to measure profitability by indicating the rate of profit earned on each sales dollar.

Question 5

A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management.

Accepted Answer

The statement is incorrect. An advantage of using the residual income performance measure is that it actually encourages managers to achieve returns that exceed the minimum required by upper management, as any excess income generated beyond the required return can be added to the manager's performance evaluation and compensation.

Question 6

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets. In this case, investment turnover is $30,000/$25,000 = 1.2.

Question 7

The minimum accepted divisional operating income is set by top management by establishing a maximum return considered acceptable on invested assets.

Accepted Answer

The minimum accepted divisional operating income is set by establishing a minimum return considered acceptable on invested assets, not a maximum.

Question 8

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

Accepted Answer

Under the cost price approach, the transfer price is based on the cost of producing the product or service, not on the price at which it could be sold to outside buyers.

Question 9

The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.

Accepted Answer

The statement correctly defines the objective of transfer pricing. The purpose of transfer pricing is to create incentives for division managers to transfer goods and services between different divisions in order to maximize the overall income of the company.

Question 10

If divisional operating income is $75,000, invested assets are $737,500, and the minimum return on invested assets is 6%, the residual income is $36,750.

Accepted Answer

Residual income is calculated as the difference between the operating income and the product of the minimum required rate of return and the invested assets. Here, it would be $75,000 - ($737,500 * 6%) = $75,000 - $44,250 = $30,750.

Question 11

The ratio of operating income to sales is termed the profit margin component of the return on investment.

Accepted Answer

The profit margin component of the return on investment (ROI) measures how much out of every dollar of sales a company actually keeps in earnings, which is essentially the ratio of operating income to sales.

Question 12

If divisional operating income is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000.

Accepted Answer

The residual income is calculated as the divisional operating income minus the product of the minimum required return rate and the invested assets. So, it would be $100,000 - ($850,000 * 8%) = $100,000 - $68,000 = $32,000.

Question 13

Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.

Accepted Answer

Transfer prices are commonly used in decentralized organizations where different units may be organized as cost, profit or investment centers. These transfer prices help allocate costs and profits between the different units and ensure that appropriate performance evaluation and resource allocation decisions are made.

Question 14

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

Accepted Answer

Investment turnover is calculated as sales divided by invested assets, so in this case, it would be $30,000 / $25,000 = 1.2. The statement is actually true, not false. My initial response was incorrect due to a misunderstanding of the question's request for the format of the answer.

Question 15

The minimum acceptable divisional operating income is set by top management by establishing a minimum return considered acceptable on invested assets.

Accepted Answer

The minimum acceptable divisional operating income is indeed set by top management by establishing a minimum return considered acceptable on invested assets, often referred to as the "hurdle rate" or "required rate of return." This helps ensure that divisions are meeting the company's financial objectives and are efficiently using their assets.

Question 16

The ratio of sales to invested assets is termed the investment turnover component of the return on investment.

Accepted Answer

The statement is true. The investment turnover component of the return on investment is calculated by dividing sales by invested assets.

Question 17

If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3.

Accepted Answer

Investment turnover is calculated by dividing sales by invested assets. In this case, investment turnover is $975,000 / $750,000 = 1.3.

Question 18

The excess of divisional operating income over a minimum acceptable operating income is termed the residual income.

Accepted Answer

Residual income is defined as the amount of operating income that exceeds the minimum acceptable operating income, often used to assess the performance of a division or investment.

Question 19

If operating income for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

Accepted Answer

Investment turnover is calculated as sales divided by invested assets. Therefore, the investment turnover is $263,750 / $187,500 = 1.41.

Question 20

If operating income for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

Accepted Answer

The profit margin is calculated as operating income divided by sales, which in this case is $5,000 / $30,000 = 16.67%.

Quiz 24: Evaluating Decentralized Operations

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also to the total magnitude of operating income earned by each division.

In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets.

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.

The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.

A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management.

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

The minimum accepted divisional operating income is set by top management by establishing a maximum return considered acceptable on invested assets.

Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers.

The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so.

If divisional operating income is $75,000, invested assets are $737,500, and the minimum return on invested assets is 6%, the residual income is $36,750.

The ratio of operating income to sales is termed the profit margin component of the return on investment.

If divisional operating income is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000.

Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers.

If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2.

The minimum acceptable divisional operating income is set by top management by establishing a minimum return considered acceptable on invested assets.

The ratio of sales to invested assets is termed the investment turnover component of the return on investment.

If operating income for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3.

The excess of divisional operating income over a minimum acceptable operating income is termed the residual income.

If operating income for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3.

If operating income for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%.