Chapter 10: Performance Measurement in Decentralized Organizations
ROI can be calculated as ______.
-margin × turnover -net operating income ÷ average operating assets
Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.
decentralized, increase
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
Which of the following are disadvantages of decentralization?
-Lower-level managers may have objectives that differ from the objectives of the entire organization. -Lower-level managers may make decisions without understanding the big picture. -Coordination among departments may be lacking.
Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers?
-Residual income -Return on investment (ROI)
Which of the following ratios are part of the ROI formula?
-Sales ÷ Average operating assets -Net operating income ÷ Sales
A company can increase its return on investment (ROI) by ______.
-increasing sales -reducing operating expenses
Disadvantages of decentralization include ______.
-lack of coordination -spreading innovative ideas may be difficult -clashing objectives between departments and the organization
Which of the following statements is correct?
A manager might reject a proposal using ROI that the manager would accept using residual income.
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.
ROI is a method used to evaluate ______.
investment centers, but not cost or profit centers
Managers of cost centers are expected to ______.
minimize costs, while providing an acceptable level of service
When a manager is evaluated on residual income, an investment is acceptable when ______.
net operating income for the investment is above the minimum required return on average operating assets
The inability to compare divisions of different sizes is a major disadvantage of ______.
residual income only
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
Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?
-The project should be accepted by the company because it increases overall residual income. -The department manager may not want to accept the project because it will lower the overall ROI for the department.
Which of the following is not a characteristic of decentralization?
Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.
Macey, Inc.'s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is ______.
Reason: Net operating income ÷ Average operating assets = $70,000 ÷ $350,000 = 20%.
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
Which of the following business segments would not be considered a cost center?
Retail outlet
Net operating income ÷ Average operating assets =
Return on investment
The ROI formula typically uses ______.
average operating assets for the year
A disadvantage of the residual income approach is that it ______.
cannot be used to evaluate different sized divisions
Decision-making authority lies mostly with higher-level managers in strongly ______ organizations.
centralized
An organization in which decision-making authority is spread throughout the organization is ______.
decentralized
Using net book value (instead of gross cost) to calculate average operating assets ______.
increases ROI over time
Residual income is a measure used to evaluate managers of ______ centers.
investment
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ likely to pursue projects that will benefit the entire company.
more
EBIT is another term for ______.
net operating income
The net operating income that an investment center earns above the minimum required return on its average operating assets is ______.
residual income
Which of the following is not one of the three primary types of responsibility centers?
sales
In decentralized organizations, decision-making authority is ______.
spread throughout the organization
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______.
there are fewer managers that must be consulted before a decision is made
In a decentralized organization ______.
-changes in the operating environment can be responded to rapidly -top management can concentrate on issues such as overall strategy -lower-level managers are trained for higher positions.
Operating assets include ______.
-equipment -inventory -accounts receivable
