Question

9.         Which of the following is a performance measure of profit centers?

A. return on investment

B. residual income

C. contribution margin

D. economic value added

10.       Which of the following is not a decision that investment center can make?

            A. Where to buy the materials

            B. Selling price of the product made   

C. How much operating assets are used in operation

D. How much funds are invested in stocks

E. How much wages to pay to workers

11.       Return on investment is:

            A. Margin x Turnover

            B. Margin x Variance

            C. Turnover x Minimum rate of return

            D. Turnover x Residual income

12.       Which of the following is not true of residual income?

            A. Residual income is the excess of actual income over the minimum required income.

            B. Minimum required income is determined by the minimum rate of return required and net

    operating assets used.

C. Residual income can mitigate the goal incongruence problem (good projects to the company

    May not be undertaken by self-interested divisional managers).

D. Residual income can be used to make performance comparisons among different divisions with

    different sizes.

13.       The following information is given:

Division X’s current ROI is 20%. This division is evaluated on the basis of ROI.

            Division Y’s current ROI is 23%. This division is evaluated on the basis of residual income.

            The company’s headquarters requires 16% as the minimum required rate of return.  

           

            There is a project that will generate a 18% ROI. Will these divisions accept the project?

                        Division X       Division Y

A.        Yes                  Yes

B.         Yes                  No

C.         No                   Yes

D.        No                   No

14. The following information is available for Division A of True Company:

Division A
Sales	$3,000,000
Net operating income	150,000
Average operating assets	1,000,000
Minimum required rate of return	12%

            Compute:

            (a) Margin

            (b) Turnover

            (c) Return on investment

            (d) Residual income

15. The following information is available for Division B of True Company:

Division B
Average operating assets	$5,000,000
Residual income	100,000
Minimum required rate of return	12%

Return on investment is:______%.

Answer 1

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9	C. contribution margin
10	A. Where to buy the materials
11	A. Margin x Turnover
12	Option D.

13

Option C.

Because the project that will generate a 18% ROI but X's RPO is already 18% and is evaluated on the basis of ROI. SO it will reduce X's ROI. Y is evaluated on the basis and the projects ROI (18%) is greater than company’s headquarters requires minimum required rate of return (16%) by 2% (18%-16%). So Y will accept it.

		Amount $
14	Sales	3,000,000.00
	Net operating income	150,000.00
Ans a	Margin	5.00%
	Sales	3,000,000.00
	Average operating assets	1,000,000.00
Ans b	Turnover	3.00
	Net operating income	150,000.00
	Average operating assets	1,000,000.00
Ans c	Return on investment	15.00%
	Average operating assets	1,000,000.00
	Minimum required rate of return	12%
	Minimum required return	120,000.00
	Net operating income	150,000.00
Ans d	Residual income	30,000.00
15	Average operating assets	5,000,000.00
	Minimum required rate of return	12%
	Minimum required return	600,000.00
	Add: Residual income	100,000.00
	Net operating income	700,000.00
	Net operating income	700,000.00
	Average operating assets	5,000,000.00
	Return on investment	14.00%