Exam 19: Divisional Financial Performance Measures

Correll Company has two divisions, A and B. Information for each division is as follows: A B Net earnings for divi sion £40,000 £260,000 Asset base for division £100,000 £1,200,000 Target rate of return 15\% 18\% Margin 10\% 20\% Weighted average cost of capital 12\% 12\% What is the residual income for A?

The following information is provided: Operating Average Operating Froject Income Investment A £44,000 £400,000 B 70,000 800,000 C 30,000 600,000 Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 8 per cent. If you were the division manager and you were evaluated based on ROI, which projects would you accept?

A disadvantage of ROI is

In order to promote goal congruence, a manager of an investment centre is best evaluated using

The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the following four investment opportunities available to the division. Parkes, Incorporated, requires a minimum return of 10 per cent. Investment Opportunity Income Investment 1 £91,000 £650,000 2 63,000 700,000 3 59,400 540,000 4 117,600 980,000 a.Calculate the return on investment (ROI) for each investment opportunity. b.If only one investment opportunity can be funded and the division is evaluated based on ROI, which investment opportunity would be accepted? c.If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible performance, which investments would be accepted?

The Marketing Department is most likely considered to be a(n)

Figure 19-4 Beta Division had the following information: Asset base in Beta Division £400,000 Net income in Beta Division £50,000 Weighted average cost of capital 12\% Target ROI 15\% Margin for Beta Division 20\% -Refer to Figure 19-4. What is EVA for Beta Division?

The following information is provided: Froject Income Investment £33,000 £300,000 56,250 750,000 27,500 550,000 Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept?

A possible disadvantage of a decentralized organization is that

An example of an investment centre is a

Figure 19-1 Project Income Investment A £40,000 £800,000 B 44,000 400,000 C 46,875 625,000 Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. -Refer to Figure 19-1 above. If you were the president of the firm, which projects would you want the division manager to accept?

Decentralization occurs when

Which of the following is a disadvantage of both residual income and ROI?

O'Neil Company requires a return on capital of 15 per cent. The following information is available for 2011: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Division } \mathrm{X} \quad\quad\quad\quad\quad\quad \text { Division } Y \quad\quad\quad\quad\quad \text { Division } \mathrm{Z}$ Book Current Book Current Book Current Sales £200,000 £200,000 £400,000 £400,000 £600,000 £600,000 Income 24,000 20,000 32,000 34,000 37,500 39,000 Assets 120,000 160,000 180,000 200,000 450,000 435,000 A)Compute return on investment using both book and current values for each division. (Round answer to three decimal places.) B)Compute residual income for both book and current values for each division. C)Does book value or current value provide the better basis for performance evaluation? D)Which division do you consider the most successful?

Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 per cent and if last year's after-tax income was £50,000, then EVA for the Asian Division last year was

GreenWorld Company wants to increase its ROI from 20 per cent to 25 per cent in the current year. They cannot increase operating income and sales from the previous year's levels of £50,000 and £1,200,000, respectively. To increase ROI, GreenWorld should

Which of the following measures should companies use for performance evaluation?

Profit centre managers would be evaluated based on

Investment centre managers would be evaluated based on

The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was