Question 1

When defining net operating income for return on investment (ROI) purposes, which of the following items should not be included?
A) Sales revenue
B) Cost of goods sold
C) Interest expense
D) Salaries expense

Accepted Answer

Net operating income for ROI purposes focuses on the operating performance of a business, excluding financing costs like interest expense. This is because ROI aims to measure the efficiency of the business operations, independent of its capital structure.

Question 2

Astin Ltd. requires all of its divisions to maintain a return on investment (ROI) of at least 25%. Over the past several years, one of Astin's divisions has consistently had the following information:  In order to achieve the company's ROI goals, this division should do which of the following?
A) Maintain average operating assets of $2,000,000 or more.
B) Maintain average operating assets of $2,000,000 or less.
C) Maintain average operating assets of $125,000 or more.
D) Maintain average operating assets of $125,000 or less.

Accepted Answer

The answer of Astin Ltd. requires all of its divisions...

Question 3

A company has computed that their "asset turnover" is 3. Which of the following statements is the best interpretation of these results?
A) For every $3 of sales, $1 of net profit is generated.
B) For every $3 invested in assets, $1 in net profit is generated.
C) For every $1 invested in assets, $3 in sales are generated.
D) For every $3 invested in assets, $1 in sales are generated.

Accepted Answer

Asset turnover is calculated by dividing net sales by average total assets. Therefore, an asset turnover of 3 indicates that for every dollar invested in assets, the company is generating $3 in sales.

Question 4

Carson Inc. Carson Inc. had the following information available at the end of its current year:
 Refer to the Carson Inc. information above. What was Carson's margin for the year?
A) 2.4%
B) 41.7%
C) 25.0%
D) 166.7%

Accepted Answer

The answer of Carson Inc. Carson Inc. had the following...

Question 5

Hardcastle Ltd. had sales of $3,600,000 and net operating income of $900,000. Operating assets during the year averaged $1,500,000. The manager of Hardcastle is considering the purchase of a new machine which is expected to increase average operating assets by 20%. If the new machine is purchased, the company's new return on investment (ROI) would be:
A) 190.5%
B) 60.0%
C) 200.0%
D) 50.0%

Accepted Answer

Current ROI = Net Operating Income / Avg. Operating Assets = 900,000 / 1,500,000 = 60%
New operating assets after the purchase of the machine = 1,500,000 * 1.2 = $1,800,000
New net operating income = $3,600,000 * 0.25 = $900,000 (since ROI = Net Operating Income / Avg. Operating Assets)
New ROI = 900,000 / 1,800,000 = 50% 
Therefore, the answer is D as the new ROI would be 50.0%.

Question 6

Residual income:
A) is an alternative to ROI for manager performance evaluation..
B) is the amount of income earned in excess of a predetermined minimum level of return on assets.
C) is equal to ROI - (Average operating assets ´ Minimum required rate of return)
D) both A and B.

Accepted Answer

Residual income is indeed an alternative to Return on Investment (ROI) for evaluating a manager's performance, as it considers the net operating income earned above the minimum required return on the company's assets. It also represents the amount of income earned in excess of a predetermined minimum level of return on assets, making both A and B correct statements about residual income.

Question 7

Which of the following is the correct formula to compute residual income?
A) Average operating assets - Net operating income
B) Average operating assets - (Net operating income ´ Minimum required rate of return)
C) Net operating income ´ Minimum required rate of return
D) Net operating income - (Average operating assets ´ Minimum required rate of return)

Accepted Answer

Residual income is calculated by subtracting the product of the average operating assets and the minimum required rate of return from the net operating income. Therefore, the correct formula is D) Net operating income - (Average operating assets ´ Minimum required rate of return).

Question 8

Carson Inc. Carson Inc. had the following information available at the end of its current year:
 Refer to the Carson Inc. information above. What was Carson's asset turnover for the year?
A) 2.400
B) 0.417
C) 0.250
D) 1.667

Accepted Answer

The answer of Carson Inc. Carson Inc. had the following...

Question 9

Duncan Ltd. has the following information available for one its divisions in the current year:  Duncan requires each of its divisions to generate a minimum return of 20%. What is this division's residual income?
A) $200,000
B) $450,000
C) $700,000
D) $1,250,000

Accepted Answer

Residual Income = Operating Income - (Minimum Required Rate of Return * Total Assets)
Given, Minimum required return = 20%
Operating Income = $1,500,000
Total Assets = $6,000,000
Minimum Required Return = 20% of $6,000,000 = $1,200,000
Residual Income = $1,500,000 - $1,200,000 = $300,000
Therefore, the residual income of the division is $300,000, which is only available in option B.

Question 10

Residual income:
A) is most useful as a way to compare individual divisions of different sizes.
B) is the amount of income earned in excess of a predetermined minimum rate of return on assets.
C) should not be used as a way to evaluate the manager of an investment center.
D) is often called economic value added (EVA).

Accepted Answer

Residual income is the amount of income earned in excess of a predetermined minimum rate of return on assets, making option B the correct choice. Option A is incorrect because residual income is not only used for comparing individual divisions of different sizes. Option C is incorrect as residual income is a good way to evaluate the performance of investment center managers. Option D is partially correct, as residual income is also known as economic value added (EVA) but it is not the only name.

Question 11

ABC Inc. has the following information available for one of its divisions:  If ABC requires a minimum return on its investments of 20%, what is their residual income?
A) $1,500,000
B) $6,000,000
C) $1,750,000
D) $350,000

Accepted Answer

The answer of ABC Inc. has the following information available...

Question 12

For the current year, Winston Inc. reported sales of $800,000 and an asset turnover of 2. The rate of return on average invested assets was 20%. The company's margin for the year was:
A) 10%
B) 40%
C) 25%
D) 50%

Accepted Answer

The margin is calculated as the profit divided by sales. Given the asset turnover of 2, we can calculate the average invested assets as $800,000 / 2 = $400,000. With a return on average invested assets of 20%, the profit is 20% of $400,000 = $80,000. Therefore, the margin is $80,000 / $800,000 = 10%.

Question 13

Bryan Manufacturing had sales of $4,000,000 and net operating income of $700,000. Operating assets during the year averaged $600,000. The manager of Bryan is considering the purchase of a new machine which is expected to increase average operating assets by 8%. If the new machine is purchased, the company's new return on investment (ROI) would be:
A) 126.0%
B) 16.2%
C) 108.0%
D) 92.6%

Accepted Answer

ROI = Net Operating Income / Average Operating Assets

ROI before purchase = $700,000 / $600,000 = 116.7%

ROI after purchase = $700,000 / ($600,000 * 1.08) = 108.0%

Therefore, the ROI would be 108.0% if the new machine is purchased, which is option (C).

Question 14

When comparing two different investment alternatives of different sizes, which of the following measures for each alternative would be the best to use?
A) Return on investment
B) Residual income
C) Net income
D) Contribution margin ratio

Accepted Answer

Return on investment is the best measure to use when comparing two different investment alternatives of different sizes as it provides a percentage return on the amount invested, allowing for an apples-to-apples comparison regardless of the size of the investment. Residual income, net income, and contribution margin ratio do not take into consideration the amount invested and may lead to inaccurate comparisons.

Question 15

Which of the following statements comparing ROI and residual income is correct?
A) ROI is more useful as a performance measure for a single investment center.
B) Residual income is a better comparative measure than ROI.
C) ROI and residual income are equally good performance measures for a single investment center.
D) Residual income is more useful as a performance measure for a single investment center.

Accepted Answer

Residual income is a more accurate performance measure for a single investment center because it takes into account the cost of capital used to make the investment. ROI only considers the return on the investment but ignores the cost of capital. Therefore, residual income provides a clearer indication of the economic value added by the investment center.

Question 16

Which of the following statements about the balanced scorecard approach is true?
A) The four perspectives of the balanced scorecard revolve around measures of quality, productivity, efficiency and timeliness, and marketing success.
B) The balanced scorecard approach requires looking at performance from four different but related perspectives: financial, customer, internal business, and learning and growth.
C) The balanced scorecard approach integrates financial and nonfinancial performance measures.
D) All of these are true.

Accepted Answer

All of the statements are true. The balanced scorecard approach involves four perspectives: financial, customer, internal business, and learning and growth. It integrates both financial and nonfinancial performance measures, and the four perspectives can include measures related to quality, productivity, efficiency and timeliness, and marketing success.

Question 17

Shannon Pharmaceuticals has the following information available for one of its divisions in the current year:  The company requires each of its divisions to generate a minimum return of 30%. What is this division's residual income?
A) $1,500,000
B) $4,300,000
C) $2,350,000
D) $8,800,000

Accepted Answer

The answer of Shannon Pharmaceuticals has the following information available...

Question 18

Carson Inc. Carson Inc. had the following information available at the end of its current year:
 Refer to the Carson Inc. information above. What was Carson's return on investment (ROI) for the year?
A) 2.4%
B) 41.7%
C) 25.0%
D) 166.7%

Accepted Answer

The answer of Carson Inc. Carson Inc. had the following...

Question 19

All else being equal, which of the following items would increase a company's return on investment (ROI)?
A) A decrease in net income.
B) An increase in fixed costs.
C) A decrease in average operating assets.
D) A decrease in sales volume.

Accepted Answer

Return on investment (ROI) is calculated by dividing net income by average operating assets. Therefore, decreasing average operating assets would increase ROI, all else being equal. Decreasing net income or sales volume would decrease ROI, and increasing fixed costs would decrease net income, all else being equal.

Question 20

Which of the following statements regarding ROI computations istrue?
A) Net income after interest and taxes is most frequently used as the measure of income in the ROI formula.
B) The fair market value of assets without regard to depreciation is used as a measure of operating assets in the ROI formula.
C) Assets used in the ROI formula are generally measured as an average of beginning and end of period numbers.
D) All assets, including those that are idle or held for resale, are included in the ROI formula.

Accepted Answer

Assets used in the ROI formula are generally measured as an average of beginning and end of period numbers. This is done to avoid distortions that may occur if only one period's numbers were used. Option A is incorrect because net income after interest and taxes is not frequently used as a measure of income in the ROI formula; rather, the operating income is used as it reflects the true economic profitability of the assets. Option B is incorrect because the measure of operating assets is usually the net book value, which takes into account depreciation. Option D is incorrect because only assets that are used in the operations are included in the ROI formula, not those that are held for resale or are idle.

Quiz 11: Decentralization, Performance Evaluation, and the Balanced Scorecard

When defining net operating income for return on investment (ROI) purposes, which of the following items should not be included?

Astin Ltd. requires all of its divisions to maintain a return on investment (ROI) of at least 25%. Over the past several years, one of Astin's divisions has consistently had the following information: In order to achieve the company's ROI goals, this division should do which of the following?

A company has computed that their "asset turnover" is 3. Which of the following statements is the best interpretation of these results?

Carson Inc. Carson Inc. had the following information available at the end of its current year: Refer to the Carson Inc. information above. What was Carson's margin for the year?

Residual income:

Which of the following is the correct formula to compute residual income?

Carson Inc. Carson Inc. had the following information available at the end of its current year: Refer to the Carson Inc. information above. What was Carson's asset turnover for the year?

Duncan Ltd. has the following information available for one its divisions in the current year: Duncan requires each of its divisions to generate a minimum return of 20%. What is this division's residual income?

Residual income:

ABC Inc. has the following information available for one of its divisions: If ABC requires a minimum return on its investments of 20%, what is their residual income?

For the current year, Winston Inc. reported sales of $800,000 and an asset turnover of 2. The rate of return on average invested assets was 20%. The company's margin for the year was:

When comparing two different investment alternatives of different sizes, which of the following measures for each alternative would be the best to use?

Which of the following statements comparing ROI and residual income is correct?

Which of the following statements about the balanced scorecard approach is true?

Shannon Pharmaceuticals has the following information available for one of its divisions in the current year: The company requires each of its divisions to generate a minimum return of 30%. What is this division's residual income?

Carson Inc. Carson Inc. had the following information available at the end of its current year: Refer to the Carson Inc. information above. What was Carson's return on investment (ROI) for the year?

All else being equal, which of the following items would increase a company's return on investment (ROI) ?

Which of the following statements regarding ROI computations istrue?