Question 1

All of the following actions are likely to increase ROI except:

Accepted Answer

Decreasing the number of units sold would likely decrease sales revenues and therefore decrease ROI. All of the other options (increasing sales revenues, decreasing operating expenses, decreasing invested capital, and improving manufacturing efficiency) would likely increase ROI.

Question 2

The following information pertains to Bishop Concrete: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,500,000 \
\text { Gross margin } & 600,000 \
\text { Income } & 90,000 \
\text { Invested capital } & 450,000
\end{array}$$ The company's imputed interest rate is 8%.
The ROI is:

Accepted Answer

The answer of The following information pertains to Bishop Concrete:...

Question 3

The basic idea behind residual income is to have a division maximize its:

Accepted Answer

Residual income is a measure of profitability that calculates the net income a company generates above its cost of capital. It is specifically designed to assess the income generated in excess of a minimum required return (a corporate imputed interest charge) on its invested capital.

Question 4

The Little Rock Division of Classics Companies currently reports a profit of $3.6 million. Divisional invested capital totals $9.5 million; the imputed interest rate is 12%. On the basis of this information, Little Rock's residual income is:

Accepted Answer

The answer of The Little Rock Division of Classics Companies...

Question 5

The information that follows relates to Kravitz Corporation:
Sales margin: 7.5%
Capital turnover: 2
Invested capital: $20,000,000
On the basis of this information, the company's sales revenue is:

Accepted Answer

Sales revenue is calculated by multiplying capital turnover by invested capital: 2 * $20,000,000 = $40,000,000.

Question 6

Consider the following statements about residual income:
I. Residual income incorporates a firm's cost of acquiring investment capital.
II. Residual income is a percentage measure, not a dollar measure.
III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is(are) true?

Accepted Answer

The answer of Consider the following statements about residual income:
I....

Question 7

For the period just ended, Techno Corporation's Stocker Division reported profit of $54 million and invested capital of $450 million. Assuming an imputed interest rate of 10%, which of the following choices correctly denotes Stocker's return on investment (ROI) and residual income? $$\begin{array}{l}
\begin{array} { l l l } 
& \text { ROI } & \text { Residual Income } \
\text { A. } & 12.0 \% & \$ 9 \text { million } \
\text { B. } & 12.0 \% & \$ ( 9 \text { million } ) \
\text { C. } & 10.0 \% & \$ 9 \text { million } \
\text { D. } & \$ 9 \text { million } & 12 \%
\end{array}\
\text { E. } \quad \text { None of the other answers are correct. }
\end{array}$$

Accepted Answer

ROI is calculated as (Profit / Invested Capital) = ($54 million / $450 million) = 12.0%. Residual Income is calculated as (Profit - (Invested Capital * Imputed Interest Rate)) = $54 million - ($450 million * 10%) = $54 million - $45 million = $9 million.

Question 8

Sunrise Corporation has a return on investment of 15%. A Sunrise division, which currently has a 13% ROI and $750,000 of residual income, is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Sunrise strives for goal congruence, the investment:

Accepted Answer

The investment should be acquired because it produces $120,000 of residual income, which aligns with the goal of maximizing overall profitability and achieving goal congruence, despite the reduction in divisional ROI.

Question 9

The following information pertains to Bishop Concrete: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,500,000 \
\text { Gross margin } & 600,000 \
\text { Income } & 90,000 \
\text { Invested capital } & 450,000
\end{array}$$ The company's imputed interest rate is 8%.
The sales margin is:

Accepted Answer

The answer of The following information pertains to Bishop Concrete:...

Question 10

The following information pertains to Bishop Concrete: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,500,000 \
\text { Gross margin } & 600,000 \
\text { Income } & 90,000 \
\text { Invested capital } & 450,000
\end{array}$$ The company's imputed interest rate is 8%.
The capital turnover is:

Accepted Answer

Capital turnover = Sales revenue / Invested capital = 1,500,000 / 450,000 = 3.33

Question 11

Which of the following is used in the calculation of both return on investment and residual income?

Accepted Answer

Invested capital is used in both calculations. Return on investment is calculated as net income divided by invested capital, while residual income is calculated as net income minus (invested capital multiplied by the cost of capital).

Question 12

For the period just ended, United Corporation's Delta Division reported profit of $31.9 million and invested capital of $220 million. Assuming an imputed interest rate of 12%, which of the following choices correctly denotes Delta's return on investment (ROI) and residual income? $$\begin{array} { l l l } 
& \text { ROI } & \text { Residual Income } \
\text { A. } & 12.0 \% & \$ 5.5 \text { million } \
\text { B. } & 12.0 \% & \$ 5.5 \text { million } \
\text { C. } & 14.5 \% & \$ 5.5 \text { million } ) \
\text { D. } & 14.5 \% & \$ 5.5 \text { million } \
\text { E. } & 14.5 \% & \$ 26.4 \text { million }
\end{array}$$

Accepted Answer

The answer of For the period just ended, United Corporation's...

Question 13

The following information pertains to Bishop Concrete: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,500,000 \
\text { Gross margin } & 600,000 \
\text { Income } & 90,000 \
\text { Invested capital } & 450,000
\end{array}$$ The company's imputed interest rate is 8%.
The residual income is:

Accepted Answer

The answer of The following information pertains to Bishop Concrete:...

Question 14

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000. Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:

Accepted Answer

The investment reduces the negative residual income, which is a measure of divisional performance. It also increases the overall residual income of the company, which is a measure of corporate performance. Therefore, the investment is attractive from both the divisional and corporate perspectives.

Question 15

BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of BFF, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was:

Accepted Answer

Residual income is calculated as the net operating income minus the product of the invested capital and the imputed interest rate. Here, the net operating income is 16% of $1,200,000, which is $192,000. The imputed interest is 13% of $1,200,000, which is $156,000. Therefore, the residual income is $192,000 - $156,000 = $36,000.

Question 16

A division's return on investment may be improved by increasing:

Accepted Answer

Increasing capital turnover (sales divided by total assets) or sales margin (sales minus cost of goods sold divided by sales) would increase the division's return on investment. Increasing the cost of capital would decrease the return on investment, and increasing expenses would decrease the net income and also decrease the return on investment. Increasing sales revenue alone may not necessarily lead to an improvement in return on investment.

Question 17

Excel Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this information, the imputed interest rate was:

Accepted Answer

The answer of Excel Division reported a residual income of...

Question 18

The following information relates to the Cliff Division of Mountain Enterprises:
Income for the period just ended: $1,500,000
Invested capital: $12,000,000
If the company has an imputed interest rate of 11%, Cliff's residual income would be:

Accepted Answer

Residual income is calculated as income minus a charge for the use of capital, which is the invested capital multiplied by the imputed interest rate. 
Residual income = $1,500,000 - ($12,000,000 x 0.11) 
Residual income = $1,500,000 - $1,320,000 
Residual income = $180,000 
Therefore, the answer is B.

Question 19

Imputed interest can best be described as:

Accepted Answer

Imputed interest is the interest that is considered to be charged on a loan, even if no interest is actually charged. It represents the minimum required rate of return on invested capital, ensuring that all financial transactions are recorded at their fair market value. This concept is often applied in transactions where the interest is not explicitly stated, such as in zero-interest loans between related parties.

Question 20

The Magellan Division of Global Corporation, which has income of $250,000 and an asset investment of $1,562,500, is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500. Assuming that Global uses an imputed interest charge of 14%, would the investment be attractive to:
1-Divisional management if ROI is used to evaluate divisional performance?
2-Divisional management if residual income (RI) is used to evaluate divisional performance?
3-The management of Global Corporation? $\begin{array}{llll}
&\text { Attractive to } & \text { Attractive to } & \text { Attractive } \
&\text { Magellan: ROI } & \text { Magellan: RI } & \text { to Global }\\hline
\text { A. } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } & \text { No } \
\text { C. } & \text { Yes } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { Yes } & \text { Yes } \
\text { E. } & \text { No } & \text { Yes } & \text { No }
\end{array}$

Accepted Answer

The investment increases residual income (RI) but decreases return on investment (ROI), making it unattractive to divisional management using ROI but attractive using RI. It is also attractive to Global Corporation as it increases overall profit.

Quiz 13: Investment Centers and Transfer Pricing

All of the following actions are likely to increase ROI except:

The following information pertains to Bishop Concrete: $\begin{array} { l r } \text { Sales revenue } & \$ 1,500,000 \\\text { Gross margin } & 600,000 \\\text { Income } & 90,000 \\\text { Invested capital } & 450,000\end{array}$ The company's imputed interest rate is 8%. The ROI is:

The basic idea behind residual income is to have a division maximize its:

The Little Rock Division of Classics Companies currently reports a profit of $3.6 million. Divisional invested capital totals $9.5 million; the imputed interest rate is 12%. On the basis of this information, Little Rock's residual income is:

The information that follows relates to Kravitz Corporation: Sales margin: 7.5% Capital turnover: 2 Invested capital: $20,000,000 On the basis of this information, the company's sales revenue is:

The following information pertains to Bishop Concrete: $\begin{array} { l r } \text { Sales revenue } & \$ 1,500,000 \\\text { Gross margin } & 600,000 \\\text { Income } & 90,000 \\\text { Invested capital } & 450,000\end{array}$ The company's imputed interest rate is 8%. The sales margin is:

The following information pertains to Bishop Concrete: $\begin{array} { l r } \text { Sales revenue } & \$ 1,500,000 \\\text { Gross margin } & 600,000 \\\text { Income } & 90,000 \\\text { Invested capital } & 450,000\end{array}$ The company's imputed interest rate is 8%. The capital turnover is:

Which of the following is used in the calculation of both return on investment and residual income?

The following information pertains to Bishop Concrete: $\begin{array} { l r } \text { Sales revenue } & \$ 1,500,000 \\\text { Gross margin } & 600,000 \\\text { Income } & 90,000 \\\text { Invested capital } & 450,000\end{array}$ The company's imputed interest rate is 8%. The residual income is:

The Fitzhugh Division of General Enterprises has a negative residual income of $540,000. Fitzhugh's management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:

BFF Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of BFF, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was:

A division's return on investment may be improved by increasing:

Excel Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this information, the imputed interest rate was:

The following information relates to the Cliff Division of Mountain Enterprises: Income for the period just ended: $1,500,000 Invested capital: $12,000,000 If the company has an imputed interest rate of 11%, Cliff's residual income would be:

Imputed interest can best be described as: