Ch10 Smartbook
A manager might reject a proposal using ROI that the manager would accept using residual income.
A project that lowers overall ROI may still be acceptable using residual income. Managers will be more likely to choose projects that benefit the entire company when using residual income.
Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress _____ and excessive operating assets which can depress _____
Margin, Turnover
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
The inability to compare divisions of different sizes is a major disadvantage of ______.
Residual Income only
True or false: Reducing wait time often enables companies to increase customer satisfaction and profits.
True Reason: Wait time is a non-value added activity that increases delivery cycle time. Reducing it can increase customer satisfaction and profits.
True or false: When ROI is calculated using the gross cost of assets, replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.
True Reason: When depreciation is disregarded the asset base will not change significantly when new, comparable assets are purchased.
Financial performance measures ______.
focus on past, not future performance need to be integrated with nonfinancial measures in the balanced scorecard
Using net book value (instead of gross cost) to calculate average operating assets ______.
increases ROI over time Reason: As accumulated depreciation increases, net book value decreases. This decreases the ROI calculation denominator and increases ROI. As a result, new investment is discouraged.
The only non-value-added component of Throughput Time
is process time
A MCE of less than 1 indicates ______.
non-value added time is present
The period from which a product begins production as raw materials and ends as a finished product is known as ______ time or manufacturing cycle time.
throughput
The manufacturing cycle efficiency is computed by relating the value-added time to the_____.
throughput time
A manufacturing cycle efficiency of 40% means that ______.
value-added activities are being performed 40% of the time the typical order is being worked on 40% of the time
True or false: Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values.
False Reason: Net book value discourages equipment replacement.
Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value?
Replacing an existing asset will not automatically decrease ROI
Leading indicators of future financial success include ______.
customer satisfaction measures
