Chapter 11 SmartBook Assignment

Carlos, Inc. requires a minimum rate of return of 10% on its average operating assets. The housewares department currently has average operating assets of $200,000 and a net operating income of $24,000. The department's residual income is $ _______.

$4,000 $24,000 - ($20,000 x 10%) = $4,000

Toys, Trinkets and More requires a minimum rate of return of 12% on its average operating assets. The toy department currently has average operating assets of $300,000 and a net operating income of $42,000. The department's residual income is $ ______.

$6,000 $42,000 - ($300,000 x 12%) = $6,000

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company is considering the purchase of equipment that will reduce expenses by $20,000. The equipment will increase average operating assets by $100,000 and be purchased by issuing a notes payable. Sales will remain unchanged. If Valley accepts the project, its return on investment (ROI) after the purchase is projected to __________ (increase/decrease) from the current level of ____% to a new return on investment (ROI) of ______%.

1. increase 2. 10% 3. 12%

In order to increase return on investment (ROI), the company must ___________ (increase/decrease) sales, and/or ___________ (increase/decrease) operating expenses and/or ___________ (increase/decrease) average operating assets.

1. increase 2. decrease 3. decrease

Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is _____%.

20% 12% × ($150,000 ÷ $90,000) = 0.2 = 20%

Residual income = A) NOI - (Average operating assets × Minimum rate of return) B) Margin × Turnover C) Net operating income (NOI) ÷ Average operating assets D) NOI ÷ Sales

A) NOI - (Average operating assets × Minimum rate of return)

Select all that apply. Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers? A) Residual income B) Return on investment (ROI) C) Standard cost variances D) Actual profits compared to budgeted profits

A) Residual income B) Return on investment (ROI)

Select all that apply. Valid criticisms of evaluating performance based on return on investment (ROI) include managers may ______. A) be put in charge of a business segment that includes committed costs over which a manager has no control B) reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI C) take actions that increase ROI in the short-run at the expense of long-term performance D) affect ROI by increasing sales or decreasing operating expenses for their division

A) be put in charge of a business segment that includes committed costs over which a manager has no control B) reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI C) take actions that increase ROI in the short-run at the expense of long-term performance

Select all that apply. A company can increase its return on investment (ROI) by ______. A) increasing sales B) reducing operating expenses C) increasing operating assets D) borrowing additional funds

A) increasing sales B) reducing operating expenses

ROI is a method used to evaluate ______. A) investment centers, but not cost or profit centers B) cost, profit, and investment centers C) cost and profit centers, but not investment centers D) profit and investment centers, but not cost centers

A) investment centers, but not cost or profit centers

The net operating income that an investment center earns above the minimum required return on its average operating assets is ______. A) residual income B) net income C) return on investment (ROI)

A) residual income

Which of the following is not one of the three primary types of responsibility centers? A) sales B) profit C) investment D) cost

A) sales

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______. A) there are fewer managers that must be consulted before a decision is made B) top management is heavily involved in the day-to-day operations C) lower-level managers are judged on non financial measures rather than financial outcomes of their decisions

A) there are fewer managers that must be consulted before a decision is made

Select all that apply. Which of the following are disadvantages of decentralization? A) Decision-making authority is removed from those with the most detailed information about the day-to-day operations. B) Lower-level managers may have objectives that differ from the objectives of the entire organization. C) Lower-level managers may make decisions without understanding the big picture. D) The layers of required approvals and decisions often cause slow customer response time. E) Coordination among departments may be lacking.

B) Lower-level managers may have objectives that differ from the objectives of the entire organization. C) Lower-level managers may make decisions without understanding the big picture. E) Coordination among departments may be lacking.

Select all that apply. Which of the following ratios are part of the ROI formula? A) Cost of goods sold ÷ Average inventory B) Sales ÷ Average operating assets C) Sales on account ÷ Average accounts receivable D) Net operating income ÷ Sales

B) Sales ÷ Average operating assets D) Net operating income ÷ Sales

Select all that apply. Garnett, Inc. has a required rate of return on new projects of 12%. The Western division of Garnett is currently earning a combined return on investment (ROI) of 14.5% on the projects in its division. The manager of the Western division is considering a project that is projected to earn 13.25%. Which of the following statements regarding the manager's decision are correct? A) The project will improve the ROI for the Western division, since it is above the required rate of return that the company has specified. B) The manager may decide to reject the project because it will lower the current ROI earned by his division. C) Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.

B) The manager may decide to reject the project because it will lower the current ROI earned by his division. C) Rejecting the project would be an example of the manager sacrificing the objectives of the overall company in order to improve his segment.

Select all that apply. 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? A) The project should be rejected by the company because its ROI is lower than the current departmental ROI. B) The project should be accepted by the company because it increases overall residual income. C) The project should be accepted because the residual income will help push the project's ROI above the projected 12%. D) The department manager may not want to accept the project because it will lower the overall ROI for the department.

B) The project should be accepted by the company because it increases overall residual income. D) The department manager may not want to accept the project because it will lower the overall ROI for the department.

The ROI formula typically uses ______. A) end of year operating assets B) average operating assets for the year C) end of year operating and non-operating assets D) average operating and non-operating assets for the year

B) average operating assets for the year

Select all that apply. Operating assets include ______. A) investments in bonds B) equipment C) accounts receivable D) inventory E) land held for investment

B) equipment C) accounts receivable D) inventory

Residual income is a measure used to evaluate managers of ______ centers. A) profit B) investment C) cost D) profit & investment

B) 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. A) less B) more C) equally

B) more

In decentralized organizations, decision-making authority is ______. A) confined to a few top executives B) spread throughout the organization C) not granted to the lowest level managers

B) spread throughout the organization

Select all that apply. In a decentralized organization ______. A) decision-making authority is reserved for top management so lower level managers can concentrate on operations. B) top management can concentrate on issues such as overall strategy C) lower-level managers are trained for higher positions. D) lower-level managers have low motivation and job satisfaction due to increased responsibility E) changes in the operating environment can be responded to rapidly

B) top management can concentrate on issues such as overall strategy C) lower-level managers are trained for higher positions. E) changes in the operating environment can be responded to rapidly

Why is using the gross cost of operating assets when calculating ROI preferable to using the net book value? A) Using the gross cost will provide an opportunity for ROI to grow automatically over time as accumulated depreciation increases. B) The net book value is rarely used by companies and may not be understood by management. C) Replacing an existing asset will not automatically decrease ROI

C) Replacing an existing asset will not automatically decrease ROI

Net operating income ÷ Average operating assets = A) Residual income B) Turnover C) Return on investment D) Margin

C) Return on investment

Decision-making authority lies mostly with higher-level managers in strongly ______ organizations. A) segregated B) diversified C) centralized D) decentralized

C) centralized

Using net book value (instead of gross cost) to calculate average operating assets ______. A) has no effect on ROI B) encourages new investment C) increases ROI over time

C) increases ROI over time

Select all that apply. ROI can be calculated as ______. A) margin ÷ turnover B) average operating assets ÷ net operating income C) margin × turnover D) net operating income ÷ average operating assets

C) margin × turnover D) net operating income ÷ average operating assets

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 ______. A) 6.7% B) 10% C) 5% D) 20%

D) 20% Net operating income ÷ Average operating assets = $70,000 ÷ $350,000 = 20%.

Return on investment = A) Net operating income ÷ Segment revenue B) Average operating assets ÷ Net operating income C) Segment revenue ÷ Net operating income D) Net operating income ÷ Average operating assets

D) Net operating income ÷ Average operating assets

Which of the following statements is incorrect regarding responsibility accounting? A) Responsibility accounting holds managers accountable for the revenues and expenses over which they have control. B) Responsibility accounting links lower-level managers' decisions with the outcomes of those decisions. C) Responsibility accounting divides the organization into "responsibility centers" to evaluate managers' decisions. D) Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

D) Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Which of the following business segments would not be considered a cost center? A) Manufacturing facilities B) Accounting department C) Personnel department D) Retail outlet

D) Retail outlet

EBIT is another term for ______. A) income after taxes B) residual income C) operating assets D) net operating income

D) net operating income

When a manager is evaluated on residual income, an investment is acceptable when ______. A) the return on investment of the new project equals or exceeds current ROI B) it generates any positive net operating income C) net operating income for the new investment is above the current return on average operating assets D) net operating income for the investment is above the minimum required return on average operating assets

D) net operating income for the investment is above the minimum required return on average operating assets

Decision-making authority lies mostly with higher-level managers in strongly __________ organizations.

centralized

The manager of a(n) _________ center does not have control over revenue or the use of investment funds.

cost

Service departments, such as the accounting department, are generally considered __________ centers, while sales offices are often considered ____________ centers.

cost ; profit

Lower-level management goals that are inconsistent with company goals are a possible disadvantage of ___________.

decentralization

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

Net operating income is income before __________ and __________.

interest ; taxes

The manager of a(n) ________ center has control over costs, revenue, and investments in operating assets.

investment

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

In order to fully understand how a manager's decisions can affect ROI, both _________ and _________ should be computed.

margin ; turnover

The manager of a(n) _________ center has control over both costs and revenues, but not over the use of ________ funds.

profit ; investment

When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on _________ _________.

residual income

Any part of an organization whose manager has control over and is accountable for cost, profit, or investments is a(n) _________ center.

responsibility

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through _________ accounting systems.

responsibility

True or False: In strongly decentralized organizations, even the lowest-level managers can make decisions.

true

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