Question

1. Jumbo Industries is considering the purchase of equipment costing $80,000. The company has a 12% required minimum rate of return. The equipment is expected to generate $20,000 in additional operating income. Jumbo’s tax rate is 25% and it’s weighted-average cost of capital is 12%. What is the equipment’s EVA?

A) 7,200

B) 5,400

C) 9,600

D) 2,400

2. People’s Construction Company has set a 15% required minimum rate of return. The company’s CFO is considering investing in a $125,000 crane that is expected to generate $25,000 of additional operating income. People’s weighted average cost of capital is 10% and its tax rate is 30%. What is cranes EVA?

A) 5,000

B) 100,000

C) 12,500

D) 17,500

3. City retail sells two products: Standard and Deluxe. The company had sales of $800,000 during the current year. The company’s contribution margin ratio was 40% and total fixed costs totaled $300,000. Sales were $600,000 for Standard and $200,000 for Deluxe. Traceable fixed costs were $150,000 for standard and $90,000 for Deluxe. Variable costs were $360,000 for standard and $120,000 for Deluxe. What is the segment margin for the Deluxe product?

A) (10,000)

B) 10,000

C) 20,000

D) 80,000

4. Althea Corporation’s Perfume division has a segment margin of $85,000 for the current reporting period. Total assets at the beginning of the period were $800,000 and $900,000 at the end of the period. What is the division’s ROI?

A) 9.44%

B) 10%

C) 10.625%

D) none of the above

5. Jumbo Industries is considering the purchase of equipment costing $80,000. The company has a 15% required minimum rate of return. The equipment is expected to generate $20,000 in additional operating income. What is the equipment’s residual income?

A) 9,000

B) 12,000

C) 15,000

D) 8,000

6. In the most recent reporting period, Athens Corporation’s Legion division generated net revenues of $2,000,000 and variable expenses of $700,000. Direct fixed expenses were $500,000 and common corporate fixed expenses were $250,000. What is the division’s segment margin?

A) $550,000

B) $1,050,000

C) $800,000

D) $1,300,000

7. Cleopatra Corporation’s Lingerie division has a segment margin of $729,000 and net sales revenue of $5,400,000 for the current reporting period. Average total assets for the period were $3,375,000. The division manager is considering implementing a new inventory system which would reduce the average total assets by $675,000. Assuming no change in sales or segment margin, the projected ROI with the reduction in inventory would be

A) 13.5%

B) 20%

C) 21.6%

D) 24%

8. Durango Corporation’s Midwestern region operates as an investment center. Rich Ruhlman, the division’s manager, has set a 15% required minimum rate of return. Ruhlman is considering investing in computerized manufacturing equipment with a cost of $220,000. The equipment is expected to generate $65,000 in additional operating income. What is the equipment’s residual value?

A) $65,000

B) $33,000

C) $32,000

D) none of the above

9) Which of the following is a shortcoming of ROI as a performance measure?

A) ROI can increase without any change in operations because of depreciation

B) It can encourage some undesirable behavior by managers

C) Both of the above

D) None of the above

Answer 1

	S.No	Answer	Description
	1	b) 5400	EVA = After Tax Operating Income - Cost of Capital
			= (20000*(1-0.25)) - (80000*12%)
			= 15000 - 9600
			= 5400
	2	a) 5000	EVA = After Tax Operating Income - Cost of Capital
			= (25000*(1-0.30)) - (125000*10%)
			= 17500 - 12500
			= 5000
	3	a) (10000)	Segment Margin = Sales Revenue - (Variable + Fixed Cost)
			= 200000 - (120000+90000)
			= (10000)
	4	b) 10%	ROI = Segment Margin/ Average Assets
			Average Assets = (800000+900000)/2 = 850000
			ROI = 85000/ 850000 = 10%
	5	d) 8000	Residual Income = Add. Operating Income - Minimum Req ret
			= 20000 - (80000*15%)
			= 20000 - 12000
			= 8000
	6	c) 800000	Segment Margin = Sales Revenue - (Variable + Fixed Cost)
			= 2000000 - (700000+500000)
			= 800000
	7	d) 24%	ROI = Segment Margin/ Average Assets
			Average Assets = 3375000 - (675000/2) = 3075000
			ROI = 729000/ 3075000 = 24%
	8	c) 32000	Residual Income = Add. Operating Income - Minimum Req ret
			= 65000 - (220000*15%)
			= 65000 - 33000
			= 32000
	9	C) Both	Both the options are correct. Self Explanatory