Question 1

Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.

Accepted Answer

A) True 
 B)False

Question 2

The Country Garden Company's current net operating income is $16,800 and its average operating assets are $80,000.The Country Garden's required rate of return is 18%.A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000.What is the residual income of the new project?

Accepted Answer

A)  20.8%. 
B)  20%. 
C)  $(150). 
D)  $300. 
A)  20.8%. 
B)  20%. 
C)  $(150). 
D)  $300.

Question 3

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000.The cash flows from these assets for the past three years have been: 
$$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash flows } \
\hline 1 & \$ 1,200,000 \
\hline 2 & \$ 1,400,000 \
\hline 3 & \$ 1,620,000 \
\hline
\end{array}$$ The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;the estimated useful life is 10-years with no salvage value.For return on investment (ROI)calculations,Marvin uses end-of-year balances.What is the ROI using current costs and gross book value?$$\begin{array} { | l | c | c | c | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { A. } & 14.0 \% & 18.0 \% & 22.4 \% \
\hline \text { B. } & 13.0 \% & 14.0 \% & 14.0 \% \
\hline \text { C. } & 12.0 \% & 10.1 \% & 9.5 \% \
\hline \text { D. } & 14.0 \% & 12.4 \% & 10.7 \% \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 4

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

Accepted Answer

A) True 
 B)False

Question 5

The Pathways Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?

Accepted Answer

A)  6.0%. 
B)  10.0%. 
C)  15.0%. 
D)  20.0%. 
A)  6.0%. 
B)  10.0%. 
C)  15.0%. 
D)  20.0%.

Question 6

How will increases in the following items affect residual income? $$\begin{array} { | l | c | c | } 
\hline & \text { Sales } & \text { Equipment } \
\hline \text { A. } & \text { Decrease } & \text { Decrease } \
\hline \text { B. } & \text { Decrease } & \text { Increase } \
\hline \text { C. } & \text { Increase } & \text { Decrease } \
\hline \text { D. } & \text { Increase } & \text { Increase } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 7

Madrigal Corporation purchased a new machine for $120,000.The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI)of 15%.ROI is computed using annual cash flows and straight-line depreciation.What is the annual cash flow using the gross book value method?

Accepted Answer

A)  $12,200. 
B)  $18,000. 
C)  $28,200. 
D)  $30,000. 
A)  $12,200. 
B)  $18,000. 
C)  $28,200. 
D)  $30,000.

Question 8

Xi,Inc.is just starting up.The management team has decided from the beginning that decentralization was the preferred organizational style and has made this clear in all interviews and discussions with potential employees.Mr.Yang,the CEO,is unsure about the best way to evaluate his division managers.He has heard the terms return on investment,residual income,economic value added,and flexible budgets but wants to know the pros and cons of each.Required:
Briefly describe ROI,residual income,EVA and other approaches to performance evaluation.Include in your discussion,where appropriate,how to calculate the measure and problem areas in the development of some of the results.

Accepted Answer

Formulas: ROI = divisional income/divisi

Question 9

Average operating assets are $110,000 and net operating income is $23,100.The company invests $25,000 in new assets for a project that will increase net operating income by $4,750.What is the return on investment (ROI)of the new project?

Accepted Answer

A)  21%. 
B)  19%. 
C)  18.5%. 
D)  20%. 
A)  21%. 
B)  19%. 
C)  18.5%. 
D)  20%.

Question 10

The ArtMart Company has three divisions: X Division,Y Division,and Z Division.Operating results for the three divisions for last year were as follows:
Corporate headquarters is offering an investment opportunity to each of the divisions.The opportunity will yield an operating income of $35,000,based on an average operating investment of $246,000.$$\begin{array} { | l | r | r | r | } 
\hline & \operatorname { Di } \times & \operatorname { Di } Y & \operatorname { Di } Z \
\hline \text { Residual income } & \$ 98,400 & \$ 27,200 & \$ 2,000 \
\hline \text { Net operating income } & 188,600 & 115,600 & 66,000 \
\hline \begin{array} { l } 
\text { Average operating } \
\text { assets }
\end{array} & 820,000 & 680,000 & 400,000 \
\hline \text { Sales } & 1,640,000 & 1,445,000 & 1,040,000 \
\hline \text { Profit margin } & 11.5 \% & 8.0 \% & 5.0 \% \
\hline
\end{array}$$Required:
a.If the divisions are being evaluated using return on investment (ROI),what will be the decision (accept or reject)of each division regarding this opportunity? Support your answer with the appropriate calculations.b.If the divisions are being evaluated using residual income,what will be the decision (accept or reject)of each division regarding this opportunity? Support your answer with the appropriate calculations.

Accepted Answer

a.ROI for new investment = $35,000/246,0

Question 11

All other things the same,which of the following would increase residual income?

Accepted Answer

A)  Increase in average operating assets. 
B)  Decrease in average operating assets. 
C)  Increase in minimum required return. 
D)  Decrease in net operating income. 
A)  Increase in average operating assets. 
B)  Decrease in average operating assets. 
C)  Increase in minimum required return. 
D)  Decrease in net operating income.

Question 12

The Maxim Corporation reported the following operating results for its three divisions: South,West,and East$$\begin{array} { | l | r | r | r | } 
\hline & \begin{array} { r } 
\text { South } \
\text { Division }
\end{array} & \begin{array} { r } 
\text { West } \
\text { Division }
\end{array} & \begin{array} { r } 
\text { East } \
\text { Division }
\end{array} \
\hline \text { Sales } & \$ 380,000 & \$ 1,700,000 & \$ 2,000,000 \
\hline \begin{array} { l } 
\text { Operating } \
\text { profits }
\end{array} & \$ 20,000 & \$ 50,000 & \$ 100,000 \
\hline \begin{array} { l } 
\text { Dwisional } \
\text { assets }
\end{array} & \$ 200,000 & \$ 625,000 & \$ 800,000 \
\hline
\end{array}$$.Which division has the smallest return on investment (ROI)?

Accepted Answer

A)  South. 
B)  West. 
C)  East. 
D)  All three divisions are the same. 
A)  South. 
B)  West. 
C)  East. 
D)  All three divisions are the same.

Question 13

The High Seas,Inc.manufactures water vessels and is organized into three large divisions: jet skis,fishing boats,and yachts.The following information presents operating revenues,operating incomes,and invested assets of the company over the last three years:

The following table shows the number of managers covered by the current compensation package of The High Seas,Inc.:$$\begin{array} { | l | r | r | r | } 
\hline \text { Number of Managers } & \mathbf { 2 0 1 6 } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 8 } \
\hline \text { Jet Skis } & 50 & 60 & 70 \
\hline \text { Fishing Boats } & 200 & 180 & 160 \
\hline \text { Yachts } & 250 & 200 & 250 \
\hline
\end{array}$$
The current compensation package is an annual bonus award.The managers share in the bonus pool.The pool is calculated as 10% of the annual residual income of the company.The residual income is defined as operating income minus an interest charge of 14% of invested assets.Required:
(1)Compute the bonus amount to be paid during each year.Also,compute the (average)individual executive bonus amounts.(2)If the bonus was calculated by divisional residual income,what would be the bonus amounts?

Accepted Answer

(1)The High Seas,Inc.(multiply each bon

Question 14

The Nacho Division of the Tex-Mex Company has a return on investment (ROI)of 12%,sales of $200,000,and an asset turnover of 2.0.What was Nacho's operating income?

Accepted Answer

A)  $6,000. 
B)  $12,000. 
C)  $24,000. 
D)  $48,000. 
A)  $6,000. 
B)  $12,000. 
C)  $24,000. 
D)  $48,000.

Question 15

Radner Industries is a division of a major corporation.Last year the division had total sales of $23,380,000,net operating income of $2,828,980,and average operating assets of $7,000,000.The company's minimum required rate of return is 12%.Required:
a.What is the division's margin?
b.What is the division's turnover?
c.What is the division's return on investment (ROI)?

Accepted Answer

a.Margin = Net operating income ÷ Sales

Question 16

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

Accepted Answer

A)  the problems associated with measuring the asset base are eliminated. 
B)  desirable investment decisions will not be neglected by high-return divisions. 
C)  only the gross book value of assets needs to be calculated. 
D)  the arguments about the implicit cost of interest are eliminateD.
Problems in measuring the asset base,gross versus net book values,and implicit cost of interest are present in both residual income and ROI.Residual income avoids the suboptimization problem with high return divisions. 
A)  the problems associated with measuring the asset base are eliminated. 
B)  desirable investment decisions will not be neglected by high-return divisions. 
C)  only the gross book value of assets needs to be calculated. 
D)  the arguments about the implicit cost of interest are eliminateD.
Problems in measuring the asset base,gross versus net book values,and implicit cost of interest are present in both residual income and ROI.Residual income avoids the suboptimization problem with high return divisions.

Question 17

The Augment Manufacturing Company has three divisions: X Division,Y Division,and Z Division.Operating results for the three divisions for last year were as follows:$$\begin{array} { | l | r | r | r | } 
\hline & \operatorname { Di } \times & \operatorname { Di } Y & \operatorname { Di } Z \
\hline \text { Residual income } & \$ 98,400 & \$ 27,200 & \$ 12,000 \
\hline \text { Net operating income } & 188,600 & 115,600 & 76,000 \
\hline \begin{array} { l } 
\text { Average operating } \
\text { assets }
\end{array} & 820,000 & 680,000 & 400,000 \
\hline \text { Sales } & 1,640,000 & 1,445,000 & 1,040,000 \
\hline \text { Profit margin } & 11.5 \% & 8.0 \% & 5.0 \% \
\hline
\end{array}$$
Required:
a.What is the ROI for each of the three divisions?
b.What is the cost of capital for each of the three divisions?

Accepted Answer

a.X: $188,600/820,000 = 23.0%
Y: $115,6

Question 18

The Dry Wall Division reports the following operating data for the past two years:
$$\begin{array} { | l | r | r | } 
\hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Turnourer } & 16 \% & ? \
\hline \text { Average operating assets } & 2.5 & 2 \
\hline \text { Net operating income } & \$ 40,000 & ?  \
\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \
\hline \text { Sales } & ? & ? \
\hline
\end{array}$$ The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Sales in Year 2 amounted to:

Accepted Answer

A)  $250,000. 
B)  $300,000. 
C)  $325,000. 
D)  $350,000. 
A)  $250,000. 
B)  $300,000. 
C)  $325,000. 
D)  $350,000.

Question 19

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

Accepted Answer

A)  accountant's 
B)  manager's 
C)  shareholder's 
D)  economist's 
A)  accountant's 
B)  manager's 
C)  shareholder's 
D)  economist's

Question 20

In computing the margin in a ROI analysis,which of the following is used?

Accepted Answer

A)  Sales in the denominator. 
B)  Net operating income in the denominator. 
C)  Average operating assets in the denominator. 
D)  Residual income in the denominator. 
A)  Sales in the denominator. 
B)  Net operating income in the denominator. 
C)  Average operating assets in the denominator. 
D)  Residual income in the denominator.

Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

The Pathways Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?

How will increases in the following items affect residual income? Sales Equipment A. Decrease Decrease B. Decrease Increase C. Increase Decrease D. Increase Increase

Average operating assets are $110,000 and net operating income is $23,100.The company invests $25,000 in new assets for a project that will increase net operating income by $4,750.What is the return on investment (ROI)of the new project?

All other things the same,which of the following would increase residual income?

The Nacho Division of the Tex-Mex Company has a return on investment (ROI)of 12%,sales of $200,000,and an asset turnover of 2.0.What was Nacho's operating income?

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

In computing the margin in a ROI analysis,which of the following is used?

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters

Exam 14: Business Unit Performance Measurement

Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

The Pathways Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?

How will increases in the following items affect residual income? Sales Equipment A. Decrease Decrease B. Decrease Increase C. Increase Decrease D. Increase Increase

Average operating assets are $110,000 and net operating income is $23,100.The company invests $25,000 in new assets for a project that will increase net operating income by $4,750.What is the return on investment (ROI)of the new project?

All other things the same,which of the following would increase residual income?

The Nacho Division of the Tex-Mex Company has a return on investment (ROI)of 12%,sales of $200,000,and an asset turnover of 2.0.What was Nacho's operating income?

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

In computing the margin in a ROI analysis,which of the following is used?

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters